Risks of a housing correction have increased, according to a major bank which predicts the government may have to take action.
“We continue to bet on a sustained soft landing in [Vancouver and Toronto] – and in Canada by extension – over the next 2-3 years. This outcome is predicated on bond yields rising gradually over time,” TD economists Derek Burleton and Diana Petramala wrote in the bank’s latest regional housing report, which focused on Toronto and Vancouver. “To the extent that yields remain stable, or even decline, from current levels, policymakers would be pressured to undertake additional action to cool the housing market and mitigate the risk of a hard landing.
“In light of this year’s continued build up in froth, the risks of a severe and painful correction have significantly increased.”
According to the economists, Vancouver and Toronto are two housing booms that could continue for years if left unchecked.
The longer they do, the harsher the correction will be, they argue.
“As such, to the extent that interest rates continue to surprise on the downside and/or markets fail to cool in the coming quarters, pressure on policy makers to implement further actions would intensify,” the economists wrote. “These would be carried out under the banner of addressing the affordability crisis and protecting the financial system against growing risks to stability.
“There would be heightened calls for additional real estate taxes targeted at foreigners or speculators, particularly in Toronto,” they continued. “Additional changes to the mortgage regulatory environment (also known as macroprudential rule changes) would also likely be on the table.”
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