Australia and Canada have seen the steepest run-ups in residential real-estate prices of any countries. Prices have risen far more rapidly than would be justified by trends in household disposable income (chart 1). Prices have risen especially in Toronto and Vancouver (chart 2). Elsewhere, price increases look a little less worrisome.
This rise in real-estate prices is being driven, of course, by low interest rates. In reaction to the shock of the Great Recession of 2008, central banks had to conduct “distressed” monetary policies (chart 3). Prices are also being driven up, mainly in a few large cities, by foreign buyers – Chinese ones in particular – who have invested massively in large Australian and Canadian cities to diversify their assets. Measures taken in parts of Canada in particular to counter urban sprawl have provided another boost to prices.
To stem the rise in prices, the authorities have used macro-prudential policy instruments, for example limiting interest-only loans, raising minimum down payments, slowing growth in bank loans to investors, etc. They have also introduced taxes on foreign buyers in certain regions.
These measures are beginning to produce their first effects, with prices slowing and, in some cases, falling. There should be a soft landing but we cannot rule out the possibility of a steep drop in cities where valuations are extreme.