As everyone knows, residential real estate has been red-hot in both Toronto and Vancouver.

The numbers truly flesh this out: The average detached Vancouver house will set you back around $1.5 million, up 37% in a year, while a Greater Toronto Area detached home goes for an average of $986,691. Toronto home values have climbed roughly 16% versus 2015.

Despite the frenzied pace of gains, some experts believe both cities’ markets might be in the early stages of cooling. As Reuters noted recently, seasonally-adjusted sales in Vancouver were actually marginally down in both March and April. Prices tend to follow sales volume trends, so this is something worth paying attention to.

Why the possible cooling? For one thing, many economists have observed that housing is simply becoming unaffordable for many buyers in the Toronto and Vancouver markets. Even with very low interest rates, prospective purchasers need significant annual incomes in order to afford a property, (assuming they require a large mortgage).

Changes to federal government mortgage rules may also explain the flattening-off in sales in these two cities, TD economist Diana Petramala noted last month. Earlier this year, the new Liberal government increased minimum mortgage payments for houses that cost between $500,000 and $1,000,000. As a result, fewer Canadians will be able to purchase properties in this price range.

Of course, even if sales are starting to cool in Vancouver real estate and Toronto real estate, there is no doubt that prices have been sizzling. In this context, the Bank of Canada recently issued a fairly blunt warning about the rapid price increases in these two key markets. Governor Stephen Poloz warned Canadians that the rate of gains was simply unsustainable, the most forceful comment yet from the central bank about real estate overvaluation.

What next?
Amid soaring prices, there have been growing calls for the government to step in to cool the housing markets of both Toronto and Vancouver. These calls are usually rooted in two concerns. First, critics maintain that the high housing prices are leaving residents in these cities without the ability to buy a home. Particularly in Vancouver, blame is often directed at foreign investors, notably from China. Critics say prices are rocketing due to the purchases of these investors, who typically don’t even live in the homes they buy.

In the case of Vancouver, it is seen as unlikely that the provincial government will take any meaningful action on house prices. However, the Globe and Mail reports that the Prime Minister is set to meet with local experts to discuss the city’s affordability crisis and what might be done to counteract it. One of the experts previewed to the Globe what he would tell Prime Minister Trudeau: “They need to start cracking down on money laundering, which is within their jurisdiction, and they need to end the Quebec Immigration Investor program, and seriously look at taxation of foreign investors.”

There are other things the federal government could do to slow the housing market nationally (which is really just being driven by Toronto and Vancouver). One option, as Scotiabank’s CEO recently suggested, would be to again raise minimum down payments. Otherwise, the government could increase CMHC insurance premiums for markets deemed to be high-risk for a significant correction. Finally, it’s been suggested that the CMHC could simply stop offering mortgage insurance in some cases. All of these potential actions would have the effect of reducing demand for houses.

So what will happen?
There are a range of possibilities, both for what the government might do and where prices may head.

In the case of the government, it’s important to keep in mind that both the provincial and federal governments have an influence on housing policy. The feds can influence mortgage regulations, for example, whereas a province can change rules about things like zoning and a land transfer tax. Adjusting these rules ultimately will feed through to higher or lower prices.

So, will governments intervene? As previously noted, it seems unlikely that the BC government will, as Premier Clark has said she wouldn’t take action that would harm the equity of local residents.

As for the federal government, they might be more inclined to act, but the degree to which they want to cool the market is tough to ascertain. One concern that is often expressed is that tightening mortgage regulations too quickly or taxing foreign investors could send the market into a tailspin.

Even if governments sit back and do nothing, it’s likely the markets of Toronto and Vancouver are about to cool. Government action will merely accelerate the process.

How much could prices fall in these two major cities? That really depends on your thinking about whether we are currently in a bubble. Those who say we are not in a bubble suggest the housing market is due for a soft landing, where prices plateau or possibly decline slightly. On the other hand, people who say we’re in a bubble believe prices could actually fall upwards of 20–30% before all is said and done.

Only time will tell.

Zoocasa is a real estate brokerage based in Toronto.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate