Policymakers launching 'full-scale attack' on Canada's home prices, says BMO

Big Six bank economist lays out moves aimed at short-circuiting runaway markets and easing home buyers' woes

Policymakers launching 'full-scale attack' on Canada's home prices, says BMO

From rising mortgage rates to provincial action and the unknown of what Canada's finance minister has in store next week, the stakes are high for domestic housing markets, according to BMO Capital Markets' senior economist.

"There is now a full-scale attack on Canadian home prices across various levels of policy," wrote Robert Kavcic in a note to clients titled "House prices in the crosshairs."

A chronic shortage of supply in major cities and their surrounding areas has put affordability under the spotlight across the country.

The Canadian Real Estate Association stated that national inventory levels were at an all-time low in January and December of last year, causing the non-seasonally adjusted aggregate home price index to rise by a record 28% year-over-year in January.

Kavcic added that four things might derail the rise in housing prices that has pushed affordability out of reach for many first-time homeowners.

The higher and enlarged tax on non-resident homeowners in Ontario, as well as the 2% tax on foreign homebuyers announced in Nova Scotia's budget, are two of the topics Kavcic noted. He also mentioned a recent increase in mortgage rates as the Bank of Canada prepares to raise rates again.

Several analysts, including those at BMO, have recently argued for a half-point boost at the bank's next policy meeting in April, while Citi and BofA have also called for half-point hikes at each of the next three rate-setting meetings.

Fixed-rate mortgages have already become more expensive due to bond market movements, with the trend-setting yield on five-year Government of Canada bonds reaching nearly 2.5% in the previous week, compared to 1.25% at the end of 2021.

"Five-year fixed (mortgage) rates are already around four per cent, and variable rates should be well into three-per-cent territory by early summer," Kavcic wrote. "This market was feasting on low-one-per-cent rates through the pandemic. No longer."

He also stated that on top of that, it's unclear what Deputy Prime Minister and Finance Minister Chrystia Freeland will include in the federal budget, which will be released on April 7.

The Liberal Party of Canada ran a lengthy plank of proposals to address housing affordability during the last election campaign. A two-year restriction on foreign buyers purchasing homes was one of the proposals offered.

However, no details on how that tax will be implemented have emerged, and a senior Ontario government source told BNN Bloomberg in December that the province was considering taking matters into its own hands by raising the tax on non-resident purchases.

In a December mandate letter, Prime Minister Narendra Modi urged Housing Minister Ahmed Hussen to honor the campaign vow on foreign buying activities, as well as other measures such as a residential property anti-flipping tax.

“The work is ongoing and we’ll have an update to share in the coming weeks,” said Daniele Medlej, a spokesperson for Hussen, in a phone conversation Wednesday.