Yahoo Finance 'Canadian housing fire needs a response', says BMO
One of Canada's biggest banks is calling on policymakers to act immediately as a "fire department" for blazing housing markets.
Bank of Montreal (BMO) senior economists laid out a series of recommendations in a new report titled Canadian Housing Fire needs a response and rated how effective a number of those measures would be.
"The extreme strength of the Canadian housing market has been well documented, and bubble talk is raging," said BMO economists Robert Kavcic and Benjamin Reitzes in the report.
"We believe the market has long been smouldering thanks to fundamentally-driven pressure from demographic and supply-side factors. Now, fuel has been poured on the fire in quantity."
They said rock-bottom low mortgage rates and guidance from the Bank of Canada create an allure that little can stop home prices from moving higher.
BMO said the most acute problem is market psychology, even as supply-side issues persist.
"The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further. That would dampen the speculation and fear-of-missing-out that those expectations are creating," said Kavcic and Reitzes.
They said the most effective way to change that psychology is through central bank action.
"The Bank of Canada could hike rates, or at least back off from its commitment to hold policy rates at near-zero until 2023," said Kavcic and Reitzes.
"Interest rates and the Bank of Canada's commitment to keep them low for years are arguably the key drivers behind the meteoric surge in home sales and prices across large swathes of the country. A move here would have an immediate, clear and notable impact to cool housing."
They said a rate hike is a blunt tool that risks lengthening the economic recovery, while creating a drag on growth by a rising loonie.
According to BMO, an open bidding process and speculation tax would be the next most effective tools with high impact. Taxing non-residential property sales at the full-marginal tax rate, increased single-detached home supply, and a national non-resident tax are rated medium impact. Meanwhile, tighter mortgage rules, limiting equity takeout, and removing principal residence exemption are rated low impact.
Action is needed now to avoid more severe consequences down the road, BMO warned.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.
Download the Yahoo Finance app, available for Apple and Android.
