Houses for sale in Ottawa

For housing market to normalize, home prices would need to correct by nearly 30%, David Rosenberg says

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Ottawa’s lofty immigration targets are exacerbating Canada’s housing affordability crisis that could create an “unstable situation” while possibly jeopardizing the Liberals’ re-election, according to Bay Street economist David Rosenberg.

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“A nation where folks in their 30s are crowded out of the housing market because of an elongated period of excessive home price inflation that is the result of federal government policy is not a very happy nation,” he said in his widely read Breakfast with Dave newsletter on May 3. “This will all come out in the wash in the next election, and if I were in opposition, this is the card I would be playing.”

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Canada already had a demand-supply imbalance prior to Prime Minister Justin Trudeau’s government announcing updated immigration targets to the tune of 500,000 newcomers a year, Rosenberg said.

Increasing the growth of the population, which added a record of more than one million people last year, is helping sustain inflation and preventing the Bank of Canada’s rate hikes from taking steam out of the housing market, he said.

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Home prices, meanwhile, are beginning to rise again and add more inflationary pressure since the ratio of population to housing stock is 40 per cent above historical norms, Rosenberg said.

In April, Toronto real estate prices rose four per cent month over month, the third monthly gain in a row, bringing the average home price to $1.15 million, according to the Toronto Regional Real Estate Board.

“The problem is that the country does not have the adequate supply, especially when it comes to residential real estate, to absorb this sort of immigration-led population growth without exerting further strains on the stretched housing market,” Rosenberg said.

Making matters worse is that Canadian household incomes are becoming increasingly stretched and the debt-to-income ratio has reached “record” levels of 180 per cent, he said.

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Rosenberg said it’s unlikely that the Bank of Canada will hike rates again, so Canada Mortgage and Housing Corp. “has to grow the stones to start to tighten mortgage credit and soften demand pressures through non-price rationing of available loans.”

For the housing market to normalize, home prices would need to correct by nearly 30 per cent, the central bank would need to bring the overnight policy rate down by two percentage points or incomes would need to swell 40 per cent, he said.

Current immigration targets stand in the way of home prices dropping and it’s unlikely the Bank of Canada would drop the policy rate to that level given inflation is still above its target zone of one and three per cent. As for income, “no way, no how will incomes boom by 40” per cent in the near future, Rosenberg said.

“What is needed is for the BoC to allow for lower rates, but what that needs is a fiscal and regulatory policy that will foster a return to more reasonable home prices (sorry, existing homeowners — your net worth needs to go down) and sustainably low inflation (which Ottawa’s policies when it comes to spending and immigration are working against).”

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