Governments terrified of popping foreign-buyer housing bubble: Don Pittis

There's a bidding war for government action on Canada's soaring housing market, butasfingers point to foreign buyers as a reason for escalatingprices,governmentsat all three levels arenot yetmotivated to cool the market down.

Young Canadians complain home ownership is increasingly beyond theirreach. Governments fearrules to put a lid on stratosphericprices expected to show another strong increase in today'sreal estate data for April could have an an economic impact far beyond the first-time buyer market.

• Tax on home flippers may be helpful, but most foreign investors are likely legitimate
• Toronto, Vancouver are creating all Canada's job growth

The difficulty governments face is that while Canadian manufacturing and exports fall, while oil and resources crash, the property market has become the spark plug of the economy. The proverbial engine of growth is firing on a single cylinder.

Efforts to tabulate exactly how much foreignmoney is entering the market are unlikely to be definitive. The debate over whether it is five, 14or 66 per cent of sales, to quote some of the estimatesina recentMaclean's article,willnot be easily resolved.

Family members can be placeholders for overseas investors. Layers of corporate ownership can do something similar, as South China Morning Post Vancouver correspondent Ian Young explains.

And that may be just the way a lot of those who benefit from the real estate market want to keep it.

The fact is the foreign contribution to rising prices is only acceleratinga global phenomenon that would have happened in Canada anyway. The real issue is land, hence the real estatetruism: "They ain't makin' any more of it." As populations grow, prime land close to where people want to live inevitably gets bid up in value.

Compared to the rest of the world, Canada has been living in a bubble. Ours isa huge country with a small population, so for decades Canadians have imagined it theirGod-given right to sprawl out over the best agricultural land surrounding our cities, offering everyone asuburbanbackyard and a picket fence.

The end of that seemingly endless sprawl just happenedto coincide with historically low interest rates andlarge partsof a global population having risen from poverty to be at least as rich as Canadians. No longer the poor and hungry, many now have a healthy downpayment.

The very difficult question facing municipal, provincial and federal governments is exactly how they should respond if the new data on foreign ownership showsoverseas money is significantly distorting Canadian markets.

According to GDP figures, the two hottest cities in the fastest-growing provinces are both being powered by the property market.

"British Columbialed the country with 3.0% growth, the best pace since 2006. Residential construction offset a downdraft in mining investment,"BMO economistRobertKavcicwrote last week."Ontariowas also strong, rising 2.5% for a second year, led by the biggest gain in construction output (residential with an assist from transportation) in 14 years."

Foreign vs. domestic demand

Even if the Canadian housingmarket is principally driven by domestic demand, markets that have been rising so relentlessly could be reaching a point of instability.

What governments quite rightly must be considering is what would happen if legislation to discourage foreign buyerswas just enough to crack confidence and pop what so many people worry may bea property bubble.

Vancouver prices have hit such staggering levels that even talk of a special tax or restrictions on what properties foreign investors can buycouldfeasibly send the market into a tailspin. In both Toronto and Vancouver, a slide in priceswould have echoes far beyond house prices.

Without a continuinginflux of foreign investors, new construction would likely slow and deprive the economy of jobs. The sellers of existing homes would no longer count on a premium for their fixer-uppers.

Worst of all, those who entered the market recently would be under water.Younger people who are already spending almost everything they earn on mortgage billswould feel even poorer as falling prices swallowed up years of payments.

Not only that,a general decline in employment could lead to a vicious cycle of economic weakness.

• When foreign buyers abandon Canadian housing
• Foreign home buyers: How other countries limit money from abroad
• House prices may stay high in Canada: Here's why

In the bidding war for government attention, legislators must weighthe outrage of those priced out of the market against the fears of those whose livelihoods dependon a continued boom.

The best solution would be to meet in the middle, with rules that would help new buyers without mortgaging their economic future. But like your dream home, engineering a soft landing may beout of reach.

Follow Don on Twitter@don_pittis

More analysisby Don Pittis