Canadian government should hold off offering more help to first-time homebuyers: Royal Bank

By: Thomas I. Likness
EBC News Service

(Eagle News) — As Canada’s housing market continues to boom, a Royal Bank of Canada economist has warned more government help for first-time home buyers could hurt the economy.

“Without corresponding measures to boost supply, any measures that ultimately heat up demand further—while probably helpful to the first people who take advantage of them—increase the odds of perpetuating problematic price trends and household debt issues,” writes Robert Hogue in an economic report released Wednesday.

The report says the housing market is over-heating because of a lack of supply.

“Inventories are generally low, and property values have soared to levels far outside historical norms,” the report notes.

Fueling this demand are record-low interest rates, increased household savings and the pandemic.

Hogue writes that these factors will eventually reverse and run their course. He fears not making policy changes will have long term effects on the economy.

“Overheated markets threaten to destabilize the economy down the road it or when a correction occurs, with possible heavy costs to government,” Hogue wrote.

As well, he says money used to inflate real estate values is being taken away from more productive uses in the economy.

Finally, Hogue notes, sky-high property values widen the gap between the haves and the have-nots.

“Exorbitant land prices make it more expensive to build more affordable housing,” the report says.

Need for housing policy change

As far as advice for government policy makers, Hogue suggests housing supply issues that existed before the pandemic should be addressed.

And he says there is a need for more affordable rental options.

As well, housing policy should discourage speculative activity, which tends to make the market more volatile.

Mortgage lending rules could be tightened if it appears households are taking on too much debt.

Perhaps the most controversial suggestion is the removal of the principal residence exemption from capital gains tax.

Hogue offers no silver bullets.

“All demand-side options have side effects and work, at best, for a limited time,” he concludes.
(Eagle News Service)