Two bank economists say a “speculation tax” on newly-purchased homes is a measure that could be considered to cool down the hot Canadian real estate market.

Robert Kavcic and Benjamin Reitzes with BMO Economics made the suggestion as part of possible measures they outlined in a recent report.

The tax is actually a “special capital gains tax on the sale of residential real estate”.

The tax would apply to homes “purchased from today forward”.

The economists went on to state that this tax will be “falling to zero over five years of holding the asset”.

This could apply not only to non-principal residences but also to primary homes.

At present, the sale of principal residences in Canada is not subject to capital gains tax.

“On principal residences (if applied), the speculation tax would effectively become a capital gains tax that fades through the five-year window,” Kavcic and Reitzes wrote in a report Tuesday (March 30).

For non-principal residences, the “maximum capital gains tax would become the current rate…plus the speculation tax”.

“This could easily crowd out speculation, and alter market psychology,” Kavcic and Reitzes wrote.

In the report, the BMO economists noted that “bubble talk is raging”.

“We believe the market has long been smoldering thanks to fundamentally-driven pressure from demographic and supply-side factors,” Kavcic and Reitzes stated.

Kavcic and Reitzes also said that policymakers “need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road”.

“The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further,” the economists explained.

Among their list of possible measures is for the Bank of Canada to either increase interest rates or back off from its commitment to keep rates at almost zero until 2023.

“Interest rates and the Bank of Canada’s commitment to keep them low for years are arguably the key drivers behind the meteoric surge in home sales and prices across large swathes of the country,” Kavcic and Reitzes wrote.

The economists also mentioned a “national non-resident buyers tax”.

The tax can be applied individuals who are not citizens or permanent residents of Canada or by foreign corporations.

“A national tax could simplify the policy (i.e., one uniform measure rather than a patchwork of regional rates), and potentially cool markets outside Toronto and Vancouver that are extremely strong,” Kavcic and Reitzes wrote.