MNI INTERVIEW: Canada Seen Letting Half-Century Home Boom Ride

Canadian policy makers will let the strongest housing boom in almost half a century run its course on signs the market can moderate on its own rather than cratering when mortgage rates climb, according to Conference Board chief economist Pedro Antunes, who has advised the finance department on budget forecasts and other lawmakers on economic policy.

Housing starts will climb 20% to reach 262,100 units in 2021, the most in 45 years, Antunes told MNI, and the average resale price will jump 24% to also mark the fastest gain in decades. While those types of outsized gains led to crackdowns on foreign buyers and domestic mortgage lending standards during the last decade over fears of a crash, this time there's less pressure for the Bank of Canada, the bank regulator OSFI or the federal government to react much.

"We certainly don't see this as a risk to financial stability in the sense that most people that have come into the market have built a fair bit of equity in their homes," he said in a phone interview. "The risk with respect to most homeowners, I think it's quite minimal, even for very new entrants into the real estate market."

Some of this year's gains are pandemic-driven demand for more space that will soon moderate to pull prices down 10 percent over the following two years, Antunes said, short of a rapid 20-25% drop many economists would see as a crash. Housing starts will also tail off 14% to 225,500 units next year, much closer to the country's regular needs, while population growth and a job rebound will help keep the market balanced and avoid any supply glut, Antunes said.

EASY MONEY ERA

There are still risks in such a torrid market, chiefly the threat that rising bond yields will spike mortgage rates, he said. The BOC won't be pushing from below with the trend-setting overnight rate stuck at 0.25% until 2023, the Conference Board of Canada predicts, joining other sources who have told MNI they see a long pause. (See: MNI INTERVIEW: BOC Seen Holding Rate to 2023, Mirroring Fed) Governor Tiff Macklem, when asked about financial stability this year, has said his main focus is restoring the economy to full output and he's monitoring some risks in consumer finances and housing.

While the federal government has recently tinkered with a "stress test" on some mortgages, Antunes notes five-year fixed loans are widely available at interest rates below 2.5%.

That easy money will be tested as the economic rebound pushes up government bond yields that influence mortgage rates towards 2.7% over the next few years, Antunes said. Canada's typical five-year fixed mortgage is often priced on a spread versus similar federal government bonds, which have yielded below 1% most of this year.

Canada suffered a housing correction around 1989, yet the pandemic has turned most thinking about another crash on its head. Demand surged with immigration cut off, ruling out a market taken over speculators or risky borrowers from abroad, record unemployment last year didn't lead to foreclosures as government benefit checks rolled out, and interest rates have been low for so long it's hard to project they will overstretch the market now. Finally, with homes in some cities averaging over a million dollars a price drop would still leave a big pool of buyers who have been priced out, reducing the downside risks.

MY HOME, MY OFFICE

"People are envisioning a world where they are going to continue to work from home, perhaps not full-time but some sort of hybrid part-time model, and they're willing to purchase more housing to accommodate that," he said.

Another thing preventing a government crackdown is an election that may be called in the next few weeks. While parties have decried a loss of affordable housing as prices surge, most solutions focus on new supply and boosting tax breaks for new homebuyers rather than taming the market.

"We now expect turning points to signal a moderate pullback, not a meltdown. This may negate the need for further regulatory action following relatively modest efforts to date," Antunes said.

Source: Canada Mortgage and Housing Corp.