More than just foreign investment

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A major bank economist has raised the spectre of another factor driving real estate in Canada's hottest markets to absurd levels, and he is imploring policy makers to take note.

Sal Guatieri, senior economist with Bank of Montreal Nesbitt Burns, ruled out a number of factors driving real estate prices in Vancouver and Toronto before settling on two he believes are the main culprits.

“That leaves two other drivers—foreign wealth and speculation. Growing evidence suggests the former is a key factor, which offers hope that both markets will be spared a severe correction if the inflow of wealth continues,” Guatieri said in a recent research note. “If speculation is also at play—and the number of homes bought and sold within a year in Vancouver has indeed turned higher—then both regions could face a downturn.”

The factors Guatieri ruled out include record-low interest rates, job growth, and lending growth. He also argued the reduction in land supply doesn’t “fully explain” price increases in Toronto and Vancouver.

Sales jumped 18% year-over-year in Vancouver last month and prices were up 30% year-over-year.

Meanwhile, in Toronto, sales ballooned by 11% and the average price rose by 15%.

Guatieri noted Deputy Bank of Canada Governor Lawrence Schembri recently raised concerns about the impact investment speculation is having on those markets. And he implores policymakers to take note – and, indeed, intervene.

“The sooner that governments can provide a clearer picture of how much speculative investment is driving these price moves and take meaningful action to curb the excesses, the better the chance of avoiding a messy outcome,” Guatieri said.

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