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The chief economist of one of Canada’s biggest banks has an idea on what policymakers should do to cool the country’s housing market: nothing, at least for now.
“In terms of tightening aimed at housing, it might be better to wait for warmer economic climes, when other sectors are picking up pace, before we do anything that risks cooling housing activity and construction,” writes Avery Shenfeld, CIBC’s chief economist, in a recent note.
“At that point, some good old-fashioned interest rate hikes might be all that it takes to put a damper on housing inflation,” he continues.
The reason Shenfeld recommends this laissez-faire approach right now is because cooling measures can have an impact far beyond home prices — like on jobs, for instance.
“The challenge is that steps to dampen house prices, unless they entail supply-side measures to stimulate new construction and land availability, could also have negative implications for home building and turnover,” says Shenfeld.
“Both are important as sources of employment, and for how the economy meets the needs of its household sector,” he adds.
At a time when the Canadian economy has been sluggish to say the least — it actually shrunk by 1.6 per cent in this year’s second quarter, its worst performance since 2009 — housing has taken on an increasingly important role, more than one economist has noted.
As the country’s energy sector, a long-time pillar of the economy, has struggled, Ontario and BC have become economic leaders for Canada in no small part thanks to their hot real estate markets, particularly Toronto and Vancouver.
GDP growth in both provinces would have tracked at less than two per cent last year had it not been for real estate agent services and home building.
“That’s not to say that soaring prices don’t raise questions about longer-term risks to economic stability,” Shenfeld admits.
“But when thinking about policy responses and their impact on economic growth, sometimes you have to be careful what you wish for, or at least when you wish for it,” he says.