Canada Needs House Prices To Drop. Here's How To Make It Happen.
Daniel Tencer | Business Editor, Huffington Post Canada
Canada’s federal Liberals are stuck between a rock and a hard place, and they know it.
With home affordability rapidly deteriorating in Ontario and British Columbia, the public wants action on soaring house prices. On the other hand, outside those two hot provinces, house prices in Canada are falling, on average.
This is a serious policy conundrum, as Prime Minister Justin Trudeau has himself noted: How do you cool off two Canadian housing markets without tanking the ones that are already struggling?
Fortunately, there are options to cool off only the problematic parts of the housing market — options that, hopefully, Finance Minister Bill Morneau’s newly announced working group on housing will consider.
But meaningful action will require political courage, and the first act of courage is to admit that house prices in Toronto and Vancouver don’t just need to slow down — they need to come down.
Affordability in Toronto is the worst it’s been since the 1990 housing bubble. Vancouver just became the most unaffordable housing market ever recorded in Canada. Short of everyone getting a huge raise, the only way to bring affordability back in line in a reasonable amount of time is for prices to come down.
So how much would a correction have to be? Large. Moody’s Investor Service recently entertained a scenario in which Ontario and B.C. house prices fall by 35 per cent, calling it a “severe stress scenario.”
But would that really be so “severe”? A 35-per-cent decline would bring Vancouver prices back to last year’s levels, and Toronto prices to 2014 levels. It’s hard to believe that financial apocalypse will follow if we have last year’s house prices next year.
Simply put, a planned, policy-driven house price correction is what’s needed. Here are some things government could do to address housing affordability. But first, one thing Trudeau and other policymakers should not do.
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