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Scotiabank Economist Calls Out Bank of Canada for “Overreaching” as Home Prices Continue to Soar

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So far, real estate activity reported for the month of March is proving to be — as expected — staggering.

Last month, 15,652 home sales were recorded throughout the GTA, a whopping 97% increase from the 7,945 homes sold in March 2020. This was bolstered by 7,577 detached home sales throughout the region, according to the latest data from the Toronto Regional Real Estate Board (TRREB).

During this same period, TRREB said the average selling price in the GTA reached $1,097,565 — up 21.6% year-over-year from $902,787 — with low-rise home sales in regions surrounding Toronto driving price growth.

And while COVID, of course, has been a major player in upticks of both market activity and costs, Scotiabank Head of Capital Markets Economics Derek Holt says the Bank of Canada should take some responsibility for the soaring prices residential real estate is seeing right now.

READ: GTA Home Sales Up 97% in March, Average Selling Price Hits $1.1M

“I think there are many drivers of the strengthened housing market, but the Bank of Canada has been one of them,” Holt told BNN Bloomberg in a television interview on Tuesday.

To begin, Holt noted he “wouldn’t fault” the major bank for having policy interest rates at “essentially zero,” considering more than half a million Canadians — who did have jobs pre-pandemic — are now unemployed. Inflation remains below their target too.

“I have more of a bone to pick with the fact that they continue to guide heavily-indebted Canadians who are buying all these homes to believe that the cost of borrowing won’t increase for years to come,” Holt said.

The economist went on to say that this promise — that borrowing costs aren’t set to rise in the near future — is “overreaching,” in his eyes. Holt argued that as vaccine distribution began and fiscal policy started emerging in the fall, the Bank of Canada should have “changed their narrative.”

In October, the Bank of Canada released its economic outlook and revealed that it would be holding its key overnight rate, once again, at 0.25%.

“The Canadian and world economies have rebounded sharply from the severe downturns experienced with the onset of the COVID-19 pandemic,” said the bank in its report. “However, the virus continues to spread worldwide, and it is still having significant economic impacts.”

The Bank of Canada declared its benchmark rate would remain low through to the economy’s projected recovery in 2023, which would help keep businesses afloat… but cheap borrowing costs for those hunting for residential realty are another result of such a move.

These low costs, alongside increased household savings (thanks to spending more than a year staying home), have one third of first-time homebuyers in Canada believing now is a good time to buy.

The influx of intrigue has been one of the key factors in home prices being driven upward — in Toronto and in Vancouver, too — while inventory struggles (and then fails) to keep up.

“It would be nice to see the federal government play a bit of a leadership role in bringing together the parties that control the supply side of the picture — the provincial and local governments — that have been largely negligent in their roles [since even before the global financial crisis,]” Holt said.

“The big problem here is not the demand side, it’s the fact that supply is so exceedingly tight, in part because we constantly lag the cycle in bringing new product to the market so there are shortages out there driving these bidding wars.”

Resulting from these market fluctuations is what Bloomberg describes as a “spirited debate” on Bay Street, wherein measures such as a potential capital gains tax on primary residences, and alterations to the mortgage stress test are being considered.

What’s more, Bloomberg reports that the Bank of Canada says it’s “keeping a close eye” on the activity which could be driving home prices higher: Signs of increasing mortgage borrowing costs, for instance.

Indeed, despite interest rates resting at the lowest of lows, “the yield on a benchmark Canadian government five-year bond – which underpins rates on lending products like a five-year variable rate mortgage – has been rising steadily due to broad bond market dynamics.”

To this, Holt said that bond yields heightening would release some of the pressure the Bank of Canada currently faces to raise its benchmark earlier than expected, though it would still be integral for the bank to warn Canadians that rates could rise sooner than what earlier predictions called for.

“We still have to, in my opinion, guide Canadians to believe that interest-rate risk can cut in both directions: that they may go up earlier than anticipated, in part because of very, very strong growth and strong fiscal policy,” Holt said.

In the interim, Canadians can rest assured that at the very least, their collective intuition isn’t holding its breath for a sudden downslope in housing prices. In fact, 60% of Canadians expect residential real estate costs to increase over the next six months.

Meanwhile, here in Toronto? Well, the “asking price,” is DOA, and that harsh reality that may well tell you everything you need to know.

With files from Ainsley Smith.

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