Home prices are surging in Toronto after a clampdown on foreign buyers on the other side of the country, in the latest example of how relentless overseas demand is outrunning policy makers' efforts to tame buying.
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British Columbia authorities slapped a 15% tax on foreign buyers last July to curb a run up in Vancouver, where house prices rose 30% in a year. Almost immediately, sales in Vancouver plummeted -- and took off in Toronto, Canada's largest city and 2,700 miles to the east.
The migration of the housing bubble -- as some prominent economists have called the latest surge in home prices -- also points to how tough it is for lawmakers to manage potential bubbles-in-the-making when interest rates sit at near-record lows.
As of March, a 28.6% rise from a year earlier pushed the average cost of a Toronto home to just under C$1 million ($750,000), up from $558,000 just three years ago and making it one of the fastest rising markets in North America.
"This is a bubble of historic proportions," said David Rosenberg, chief economist at asset manager Gluskin Sheff & Associates in Toronto.
Toronto's year-over-year price surge is so stark, and the city is so important to the Canadian economy, that a correction in home prices now poses a risk to the country's financial system, some economists warn. The Toronto area accounts for roughly 19% of Canada's country's gross domestic product.
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It also may escalate existing worries about the strength of Canada's financial system. Data compiled by the Bank for International Settlements suggest the amount of credit extended to households and nonfinancial firms and the level of house prices above long-term trends have both hit alarming levels.
The risks and strain on affordability prompted the government of Ontario on Thursday to unveil more than a dozen measures to address rising real-estate costs -- highlighted by a 15% surtax on foreign house buyers, largely mimicking what British Columbia authorities did. The government said the suite of policies, including a tax on vacant Toronto residences and caps on rent increases, is meant to bring stability to a frothy market.
"Vacant homes and speculators who never set foot in Ontario exaggerate our challenges. So we are taking action to discourage this practice," Ontario Premier Kathleen Wynne said at a press conference in Toronto.
The Toronto rise isn't entirely explained by robust economic activity and changes in domestic supply or demand factors, economists say. There isn't direct evidence showing that foreign buying has increased in Toronto, and Canadian data on such transactions are weak. Still, Canada's federal government in March has pledged $241 million over a decade to bolster housing data collection.
Bank of Canada Gov. Stephen Poloz, who has warned repeatedly about the growing risk of overvalued housing in Canada, last week cautioned that Toronto's gains are unsustainable and "divorced from any fundamentals that we can identify."
Mr. Poloz has also said an interest-rate hike wouldn't be the right tool to tame the housing market, highlighting the dilemma faced by central bankers world-wide. Like his counterparts in Sweden, Australia and New Zealand, countries that also have struggled to recover from the credit crisis or have been hit by the more recent downturn in commodities prices, Mr. Poloz is keeping interest rates at rock-bottom levels to foster growth, and is maintaining that position despite exposure to a possible housing correction.
Canada's central bank has cut rates twice since January 2015 to 0.50%, and isn't expected to begin raising them until next year.
Canadian policy makers have reached for other tools to try to tame the frothiness in housing prices and to limit risky borrowing. Federal officials have stepped in on six separate occasions since 2008 with measures ranging from requiring larger down payments on costlier homes to reducing the maximum period for paying off a mortgage to 25 years from 40 years.
Some of these measures aim to reduce the risk that a correction could create systemic financial mayhem, as happened in the U.S. subprime crisis. They made it tougher for first-time home buyers but are failing to target the real sources of frothiness, said Doug Porter, chief economist at BMO Capital Markets.
"That does absolutely nothing to stop a foreigner or a speculator. And that's where the source of strength is now coming from," he said.
The Vancouver tax, unveiled last July, was introduced after some research showed that overseas buyers, mostly from China, were playing a significant role in pushing up prices. As sales volume dropped in Vancouver, the new tax appeared to nudge foreign buyers toward at least a couple of new markets, including Seattle, where the median house price in March rose 15.6% over a year to $530,000.
In and around Toronto, an already heated housing market with year-over-year price gains of more than 16% in July 2016, started picking up steam after Vancouver's tax came into effect. Agents started to notice that overbidding was escalating to new levels, said Jessie Banwait, a Toronto-area real-estate agent with Re/Max Real Estate, who has noticed a surge in foreign buying.
Agents say that foreign buyers aren't the only ones fueling Toronto's froth. John Pasalis, president of Toronto-based Realosophy Realty Inc., said domestic clients started approaching him last year about purchasing single-family homes as rental properties. Mr. Pasalis recalls, some of these buyers were indifferent to the possibility that monthly rental income might fall short in covering the mortgage and tax bill. "That started to alarm us," he said.
Now, there also are signs that Toronto's overvaluation may spread to the greater Toronto area, which is home to 5.6 million people.
For instance, house prices in Hamilton, a city roughly 42 miles west of Toronto, rose 29.5% in March from the same year-ago period; the Kitchener-Waterloo area, 66 miles west of Toronto, 32.3%; and Barrie, 68 miles north of Toronto, 43.4%. Ontario's foreign-buyer tax proposes to extend beyond Toronto to some of these affected regions, the government said.
"This is no longer a Toronto and Vancouver story," said Stefane Marion, chief economist of National Bank Financial.
Write to Paul Vieira at email@example.com
(END) Dow Jones Newswires
April 20, 2017 10:50 ET (14:50 GMT)