Canadian Real Estate Is About To Experience A “Full-Scale Attack,” Warns Big Six Bank

Canadian real estate prices are approaching a mile-long stretch of hurdles. Easy credit conditions are being rapidly reversed, and then some, according to BMO Capital Markets. The bank warned clients of a laundry list of measures designed to cool the market, all hitting at once. They’ll have a limited impact compared to the big market measure of higher rates, but will temper exuberance.

“There is now a full-scale attack on Canadian home prices across various levels of policy. Here is what has shaped up recently,” wrote BMO senior economist Robert Kavcic. Let’s dive into what he’s talking about.

Mortgage Rates Are About To Surge To The Highest Rate In Years

Canadian real estate’s biggest hurdle is market forces. Since the Bank of Canada (BoC) acted late on inflation, they’ll need to use a lot more firepower to tame it. At the same time, the highest inflation in decades is driving 5-year Government of Canada (GoC) bonds higher. The combination will see both variable and 5-year fixed-rate mortgages surge higher.  

“Mortgage rates continue to surge, with the BoC expected to accelerate its tightening pace with a pair of 50-bp moves,” said Kavcic. “Five-year fixed rates are already around 49, and variable rates should be well into 3% territory by early summer. This market was feasting on low-1% rates throughout the pandemic. No longer.”

More Foreign Buyer Taxes and Higher Vacancy Taxes

Canadian real estate is also gearing up to tackle foreign buyers, a.k.a. “Non-resident” home buyers. Ontario hiked its non-resident tax to 20% and expanded it to the whole province. Previously the province’s tax was 15% and only applied in the Greater Golden Horseshoe. For our non-Ontario readers, that’s basically the economic area around Greater Toronto.

BMO also highlights Nova Scotia joining BC and Ontario in taxing non-residents. The non-resident buyer tax in Nova Scotia will only be 5% of the purchase price, much smaller than other taxes. However, they plan on adding an additional 2% annual tax on property owned by non-residents. Higher regular carrying costs tend to reduce profitability or get passed onto households. It depends on other factors such as credit liquidity to determine how it reacts.

More To Come From Canada’s Federal Government In Weeks?

Then there are measures coming from Ottawa in the coming week. “… we’ll see what Ottawa has up its sleeve too, perhaps in the April 7th budget,” he says.

Ottawa is leaving Canadians guessing on policy movements, but the vacant home tax is almost all but done. Canada’s department of finance has been working on the details. So far there is debate on wide loopholes, but the tax is largely a psychological tax in the first place.

Breaking the speculative mindset with psychological cooling factors is important when tackling exuberance.

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