Can Canada avoid a housing bubble?
Home ownership has become a political — and economic — hot potato. Politicians are handling it with care.
Buying a house is about a great deal more than providing you and your family with permanent shelter or making an investment. Home ownership is one of the most fundamental economic and political pillars of society — which is precisely why the government of Canada is being so terribly careful not to mess with it.
Amid increasingly vocal concerns (from none other than the CEOs of Canada’s chartered banks and former Bank of Canada governor David Dodge) about the possibility of a housing bubble developing in Canada, Finance Minister Jim Flaherty has just introduced measures designed to cool the market down — at least a little bit
Because the central bank has committed to keeping interest rates low for the first half of 2010 in order to help stimulate the battered domestic economy, the worry is that Canadians are taking on massive new debt loads that they won’t be able to service when rates eventually rise.
All the latest data from the real estate sector reinforces such fears. According to the Canadian Real Estate Association, existing home sales in January were up 58 per cent from the depths of a year ago. But more critically, prices were up almost 20 per cent in that period to an average of $328, 537. That despite the fact that the economy is hardly blazing and unemployment continues to be a stubborn problem, despite some recent improvements.
All of this led Finance Minister Jim Flaherty — who, as recently as January, insisted he saw no evidence of a housing bubble — to announce some changes to the way that real estate lending is managed in Canada.
As of April 19, there will be some new, standardized criteria for mortgages. But it’s nothing that’s going to drastically affect the affordability of real estate — especially for first-time buyers — this spring. All the changes apply to mortgages backed by government-backed mortgage insurance (from Crown corporation Canada Mortgage and Housing Corporation) — a mandatory insurance when a buyer’s down payment is less than 20 per cent.
Here’s a rundown of the new criteria:
- To qualify for mortgage insurance new borrowers will have to meet the criteria for a five-year, fixed-rate loan rather than just a three-year loan. The borrower doesn’t have to take those terms — although the five-year rate is currently the most popular. It’s just a test to be certain they could still carry that amount of debt against gross income (the acceptable ration is 42 per cent allocated for housing costs from gross income) in the event interest rates pop.
- Folks who plan to refinance their houses to improve liquidity or eliminate higher cost credit card debt, can now only borrow up to 90 per cent of the value of their home, rather than the previously allowable 95 per cent.
- Those who buy non-owner-occupied residential rental properties for speculative or investment purposes now have to plop down 20 per cent of the price rather than just five per cent.
In other words, these measures are more about the perception of action than a major credit crackdown. It’s a way for the federal government to flag its concern and to take some proactive measures without really dislocating the real estate market.
At the very most, the careful steps taken by Mr. Flaherty are expected to take some of the heat out of markets where ferocious bidding wars have been steadily driving up prices for houses and condominiums.
It’s part of a gradual process that started in July 2008. Although Mr. Flaherty continues to deny there’s a housing bubble, Ottawa announced back then that CMHC would only insure mortgages when there was at least a five per cent down payment. That basically squeezed out the zero-down loans which often saw purchasers borrow as much as 103 per cent of the value of their house (land transfer and other associated charges were folded into the mortgage).
At the same time, the government stipulated that mortgages could only be amortized over 35 years rather than 40 years. Flaherty is hoping to reverse the sudden increase in 2006 of amortization periods (before this, the long-time standard was 25 years).
For those people like Mr. Dodge, who’s been publicly fretting about the sustainability of the Canadian housing market for at least four years now, Mr. Flaherty’s cautious changes may not be quite as tough as hoped. But that issue brings us to the political heart of the matter.
Being elected is a popularity contest. Maintaining a favourable home buying climate is one of the most important things a government can do to maintain that popularity. Nothing says we’re working on your behalf like voters who are able to live their dreams.
It’s also conventional wisdom that home ownership is good for both a society and an economy. People who own homes are considered to be more stable and more politically engaged — they are more likely to feel like stakeholders in their communities. Which means they vote, pay taxes and generally get involved in positive things.
Home ownership also means that there is a reliable, fixed workforce available for businesses. And homeowners are the consumers who are constantly spending the money that makes GDP go round — for appliances, furniture, home renovations and so on.
All of this — along with a remarkably resilient period of general economic prosperity — has led to a pretty deeply-ingrained set of expectations around housing. In North America, there’s not much question that home ownership has come to be viewed as an inalienable right.
Because politicians – and governmental institutions like CMHC — are among those who’ve encouraged that fundamental sense of entitlement, they have to be very careful not to rock the boat — especially when conditions are already choppy. For that reason, Mr. Flaherty has borrowed a page from central bankers’ playbook and he’s essentially trying to “jawbone” the housing market into cooling down rather than taking more Draconian steps.
Let’s hope it works before Canadians hear the loud popping noise that confirms a real estate bubble not only existed, it’s now exploded.
Source: MSN Money – February 19, 2010
Tags: housing market, Real estate news
