Reining in Toronto housing market will need delicate pas de trois

Share

Economist Derek Holt has a word of advice for the three levels of government that are looking for policy solutions to cool Toronto's overheated housing market: Be careful what you wish for.

"Rich housing valuations already permeate much of the economy and behaviour, and taking steps against it at such elevated levels [in the housing market] risks seriously damaging the economy," Mr. Holt, head of capital-markets economics at Bank of Nova Scotia, said in a note to clients on Tuesday morning.

The warning, issued in advance of Tuesday's meeting in Toronto involving federal Finance Minister Bill Morneau, his Ontario counterpart, Charles Sousa, and Toronto Mayor John Tory, is an important one. Despite the push on all levels to address the housing frenzy gripping pretty much everything within commuting distance of the Greater Toronto Area, this has become a very delicate task – to let sufficient air out of an increasingly taut balloon without accidentally popping the whole thing in a loud, reverberating bang. A heavy-handed cure – or, given the many options being tossed around, perhaps a cocktail of cures – has the potential of being worse than the disease.

Rob Carrick: Why first-timers should rethink buying in a hot housing market

Read more: Governments rule out housing measures that would boost Toronto demand

Read more: Ontario considers housing tax for non-resident speculators

Let's remember that while the current housing-market extremes are a Toronto-and-area phenomenon, they colour an economy and a financial system that belong to the whole country. The region accounts for roughly one-fifth of Canada's entire economy and the housing market has been a key component of the region's – and the country's – economic growth. On the other hand, it has also been the primary driver of the country's record levels of household debt, relative to disposable incomes.

Some experts argue our governments are arriving at this party a couple of years too late. The runaway-train phase of Toronto's housing market has only been here for a year or so, but this market was booming long before it tipped over the edge. At this stage, policy makers look as if they're cops arriving at an out-of-control frat-house party at 2 a.m.; herding the drunken revellers out the door could prove awfully messy.

Mr. Holt argues a housing market that is stretched to its extremes – of debt loads, of ownership levels, of affordability – is particularly sensitive to any change in conditions that could undermine demand and the response can be dramatic. No one needs reminding about what happened when fragile housing markets in the United States collapsed under their own weight in 2008; it didn't take long for the entire global economy to pay the price.

Adding to the problem is that to no small degree, those extremes were by design. Canada has pursued years of ultralow-interest-rate policies expressly to buoy household consumption, while the rest of the economy struggled through a difficult postfinancial-crisis recovery. The result is the household sector, and especially the housing market, have assumed an oversized role in keeping the economy growing.

And as much as the Bank of Canada has become increasingly concerned about the economic risks posed by the Toronto housing market, it also recognizes the economy's recovery is still heavily reliant on strong residential activity. The housing sector was almost entirely responsible for the central bank's substantial upgrade of its economic-growth forecast in last week's quarterly Monetary Policy Report.

"You risk removing the one pillar of the economy [housing and household consumption] that has been responsible for 80 per cent of growth since 2010, absent any traction in other areas of the economy," Mr. Holt said.

In a recent report, Toronto-Dominion Bank's economics team argued any government policy moves to rein in the Toronto market will need to be much more limited than rate hikes – and not just because of the very broad nationwide ramifications of raising rates. "Today's environment of heavily indebted households … cannot afford anything more than a soft landing in home prices," they said.

They suggested any moves should be "countercyclical" – in other words, put in place during times of economic strength, so they don't risk triggering or exacerbating an economic downturn. Policy makers would then risk imposing a substantial drag on household demand only once other segments of the economy were capable of picking up the slack.

On Tuesday, the officials from the three levels of government talked about greater sharing of information and, essentially, an agreement to avoid taking any dramatic measures that could exacerbate the problem. In terms of managing the economic impact, that sort of slow and incremental approach may be the best option. But in the meantime, every day the Toronto housing market gets more bubbly, the potential ramifications of a policy misstep grow. They have entered a delicate dance, indeed.

Want to interact with other informed Canadians and Globe journalists? Join our exclusive Globe and Mail subscribers Facebook group