By Julie Gordon

OTTAWA, Canada (Reuters) – Canada’s Ontario province is trying to control rising home prices by populist measures such as a higher foreign-buyer tax. However, economists warn that rising interest rates will do the bulk of the work.

There are already signs that red-hot markets may be cooling down following last month’s rate increase by the central bank. Data released Tuesday showed that Toronto’s average sold price fell by 2.6% between February and March. Also, annual gains have slowed.

Sal Guatieri is a senior economist with BMO Capital Markets. He said that higher interest rates would help to put out the fires. “We will probably see sales drop from the highs and there is almost certain to be a slowing down in unsustainable home price growth.

With multiple rises expected by the Bank of Canada this year, mortgages are quickly becoming more expensive. Economists expect a half-point rise in the April policy rate, which will be higher than pre-pandemic levels at year’s end.

This represents a drastic shift in borrowing costs from extremely low levels that contributed to a massive price rise. Canada’s average house price rose by 50.6% in two years, reaching a record C$816,720 (654,213).

Housing affordability is becoming an issue of political concern, and governments have increased efforts to control prices. According to a senior government source, Thursday’s federal budget is expected to focus on housing.

Ontario’s Premier Doug Ford, who presented plans last week to cut red tape on home construction, increase the foreign-buyer taxes to 20%, from 15% and expand it to all of Ontario, was announcing his intentions to go to the polls early in June.

Foreign speculation has always been very popular. According to Mike Moffatt (a senior director of the Smart Prosperity Institute), “I think it’s an easy one politically.”

According to Andy Yan (director of Simon Fraser University’s City Program), just 168,000 Ontario residential properties were held by non-residents in 2020. This is about 3% or C$66.9billion. Official data was not available.

He said that while this is a very small share overall, foreign capital can have a major impact on certain markets such as Toronto’s new condominiums. It can also drive up prices.

Yan discovered that taxes could shift demand. Yan looked at Canadian mortgage disclosures from the Bank of China and found that there was a sudden surge in new loans in Ontario following British Columbia’s imposition of a foreign-buyer tax in mid-2016.

Yan stated that the timeline for flows “makes me wonder if this was a push/pull effect” between these two provinces. Ontario enacted its foreign-buyer tax for 2017

Bank of China didn’t immediately reply to an email asking for comments.

Foreign money is not the only source of speculation. According to a Bank of Canada study, investors accounted for 20% of all home purchase in Canada in the second quarter of 2021. The highest levels of investor activity were found in Ottawa and Toronto.

Ford said that the government would also work with local governments to impose taxes on empty homes and land speculation.

Experts believe that while politicians may be asked for help in solving the affordability crisis, Canada’s growing dependence on real property means government will not take the necessary steps to protect the golden goose.

“It is not only the sale of houses, it’s all the spinoffs that you get. Christopher Alexander is the president of RE/MAX Canada. He said, “Contractor work, appliance sales. Furniture.” “The Feds will be more careful.”

($1 = 1.2484 Canadian dollars)