Market Updates April 2021 – Overheated Market? New Policies to Cool Down?

Are we in an overheated housing market?

Is the government going to make immediate policy changes to cool it down?

The market has been flooded with news over the past couple weeks.

And if you just look at the headlines, they can certainly be very confusing.

Some banks came out to say that the government needs to take immediate actions to cool down the market.

But then some banks also came out to say “Hold on guys, let’s just wait and see before making any rush policy changes”.

So today, I’m going to pick out some of the most popular headlines and we’ll dive in to see what they are really saying.

Toronto home sales up 97% in March, prices up as demand outstrips new listings

Global News

I’m sure you’ve seen similar headlines everywhere.

Well, first of all, it is not that crazy.

It sounds like sales were doubled, but we’re talking about March.

Remember March 2020?  The first half was normal.  

Then the middle of March marked the first time ever in our lives to experience a lockdown.

Of course everyone panicked back then and sales took a deep dive down.

If we just compare the second half of March last year versus this year, sales were actually up 174%.

If we isolate just the first half of March, up 41%.

So that’s how the 97% came about when you look at March altogether as a whole.

I mean 41% more sales is still a lot, but it’s definitely not as crazy as the 97% may sound.

In terms of prices, low rise prices are generally up more than 20% and condo prices are only up around 2%.

If you think the Toronto market has gone crazy, let’s take a look at the year-over-year percentage change in average prices across all the provinces in Canada.

Let’s start with Ontario.

Average prices up 24.5%, which is similar to what we’re seeing in Toronto.

Quebec, up 22.5%.

New Brunswick, up 20.9%.

Nova Scotia, up 30.4%.

Moving towards the west…

Manitoba, up 14.5%.

Saskatchewan, up 8%.

Alberta, up 8.5%.

British Columbia, up 17.1%.

Going up north…

Yukon, up 7.5%.

Northwest Territories, up 48.1%.

You see, average prices have gone up all across the country, from 7% to almost 50%.

You might think that investors are driving the prices up in big cities like Toronto and Vancouver, but the average price increase was only around 20%, which actually lags some other provinces.

And here’s the thing.

The average price increase in Toronto was mainly driven by detached homes and townhouses.

Condos are much more investor heavy but the prices have pretty much stayed the same so far.

This is pointing to the fact that the hot markets are driven by real demands.

So why is Canadian housing demand so strong?

I can sum it up with 4 reasons.

#1  Interest rates are at rock bottom lows.  I recently got a mortgage at 1.33% 5 years variable, that’s unbelievably low.  And the Bank of Canada has committed to low rates until 2023.

#2  Household savings are at record highs because people have nowhere to spend money.

#3  People are spending a lot more time at home so they want to upgrade and look for a better home.  

#4  FOMO – Fear of Missing Out.  People fear that if they don’t get into the market now, they would be priced out soon.

You see, when all 4 things happen at the same time, the result is a red hot market.

This brings us to:

Canadian Housing Fire Needs a Response


BMO published a special economic report at the end of March urging policymakers to act immediately to cool down the housing market.

The report suggested a few policy changes that the BMO economists believe could immediately break market psychology.

Suggestion #1: The Bank of Canada could hike rates, or at least back off from its commitment to hold policy rates at near-zero until 2023.

Interest rates have a much bigger impact than just the housing market.  The whole economy would be affected.

So I don’t think it makes sense to change the interest rates just to cool the housing market because that may hurt the whole economic recovery.

Suggestion #2: Implement an offer system that eliminates blind bidding in real estate transactions.  

So they think that if we have an open bidding system, this would prevent people from paying high prices.

This is the exact opposite of the current realtor’s code of ethics where the substance of the offer can’t be disclosed.

Interesting suggestion, but it’s probably not that easy to change the code of ethics.

Suggestion #3: If you purchase a residential property and sell it within 5 years, then you need to pay a special capital gains tax.

I totally agree on this one, real estate is meant to be a long term investment.

If you buy and flip, you pay extra taxes, that’s fair.

But here’s the thing.

This tax would only be effective if the market is driven by flippers.

When the current market is mainly driven by end users, then the cooling effect of this speculation tax would just be minimal.

Suggestion #4: Remove the capital gain tax exemption on principal residences, so people will start paying capital gain tax on their primary residences.

Let’s suppose you want to get into the market and own a home right now.

So I tell you that many years down the road, if you make some money on your home, then you need to pay some taxes on the gain.  

Is that going to discourage you from buying a home?

The tax could potentially discourage some current home owners from moving.

But that would also mean less supply on the market.

Even the BMO report itself rates this suggestion as VERY HIGH complexity and LOW impact on cooling the market.

When there are real needs in the market, it is very hard to kill the demands with a policy change.

Remember 2017?

The low rise market was on fire with record high prices.

Then the government introduced the 15% Non Resident Speculation Tax.

The low rise market crashed.

So you might think that the policy change took effect to cool down the market.

But if you take a look at the condo market, prices had actually been going all the way up since that crash in the low rise market.

You see, I wouldn’t say the speculation tax worked, but rather low rise homes got so expensive to a point that the demand shifted from low rise to high rise condos.

And then there was so much demand for condos that the prices kept going up.

Doesn’t this sound similar to the situation we’re having now?

The price gap between low rise and high rise is widening and soon the demand would naturally shift back to the condo market.

And so, we have:

TD CEO cautions against rush to regulation in response to ballooning home prices

His view is that a lot of the factors adding fuel to the housing market are pandemic related.

When the vaccines take effect and people are back to work, we might be seeing different trends.

That’s why he is against a rush to implement immediate policy changes.

It makes more sense to wait and see instead of just saying “Oh my god, let’s go solve something”.

I would say the only way to effectively cool the market with a lot of demand is to increase supply.

And the supply bottleneck is primarily due to the rules and regulations governing new constructions.

So the government should really work on that end to increase supply.

Until things improve on the supply end, it will be very hard for prices to come down.

I would expect the Toronto market to continue to be strong for the remaining of 2021.

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