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Reports this week from real estate boards in Toronto and Vancouver showed, for the umpteenth time, sharp year-over-year home price gains.

In Ontario’s capital, the benchmark price spiked 11.6 per cent in March, compared to one year earlier, and in Vancouver, it surged 23.2 per cent during the same period.

“Odds are that if this kind of price growth (especially in Vancouver) continues, it will end badly — but that still looks to be sometime down the road,” says BMO senior economist Robert Kavcic in commentary posted this morning.

In the same note, Kavcic highlights a question his bank was asked trailing the release of the latest Toronto and Vancouver market stats: “What will it take to stop these markets?”

He then lists what he thinks could put the brakes on runaway prices in the two cities, and why they may not in the near future.

An economic slowdown/jobless rate

It’s not hard to see how an economic downturn that leads to job losses can cool a housing market — just look to Calgary.

However, the outlook for Toronto and Vancouver is different. “Not likely anytime soon, with growth in BC and Ontario leading the country,” says Kavcic of the possibility of an economic slowdown/jobless rate spike cooling Canada’s hottest real estate markets.

Recent notes from National Bank share this view, pointing to how employment rose last year by 5.5 per cent in Toronto and 4.4 per cent in Vancouver.

Higher interest rates

“Umm, no,” writes Kavcic, shooting down the idea of rates climbing soon. With the present historically low interest rates making mortgage payments more affordable for many, Canadians are racking up an increasing amount of debt as they finance the purchase of their homes.

Higher rates could hamper this, but as Kavcic suggests, favourable lending conditions are expected to persist into 2017. BMO recently forecasted the central bank, which sets the key interest rate influencing mortgages, would maintain a hands-off approach until mid-2017.

More supply

“Condo supply is coming to market in these cities, but detached supply, as we’ve argued for years now, is drum tight and not changing,” explains Kavcic.

Contractors finished building about 7,900 single-detached homes last year, the lowest number since 1978, as BuzzBuzzHome News recently reported (check out this our graph explaining Toronto real estate bidding wars in 2016 for more).

The resale side of the market is also tight, notes National Bank economist Marc Pinsonneault in commentary published yesterday.

“In both cities, sales growth has outpaced new listings growth. As a result, the number of houses listed for sale fell to their lowest level for a (first quarter) in at least 12 years,” he says.

Affordability

As prices continue to rise, the argument goes, fewer and fewer buyers will be able to afford homes, which creates less demand and cools a market, Pinsonneault tells BuzzBuzzHome News.

However, Kavcic outlines a competing possibility: “The concern is that rising prices don’t slow activity, but rather beget even higher prices,” he says. “The Vancouver condo market might be heading down this road now,” he adds.

Policy measures

On February 15th, new rules increasing the minimum downpayment on some government-insured mortgages came into effect. Did it do anything to cool the Toronto and Vancouver markets?

“That’s a no,” snipes Kavcic. “At least not the variety (i.e., marginal changes to down payment requirements) recently introduced by Ottawa,” he clarifies.

Kavcic’s colleague, BMO chief economist Doug Porter, says policymakers “must try harder,” the National Post reports.

So what’s the takeaway?

“Probably that we are still — in these two cities — in an environment that is supportive of even further price growth,” Kavcic tells BuzzBuzzHome News in a followup interview.

“But on the flipside,” he cautions, “the longer the we go, the longer we’re going to see prices [rise to levels] that are just not sustainable.”

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