Any housing bubble is thanks to Flaherty

Any housing bubble is thanks to Flaherty


“It’s a lot harder to justify using the same program to lure amateur investors.”


While the Bank of Canada made it clear yesterday that it doesn’t see a housing bubble in this country yet, it also kept the spotlight on Finance Minister Jim Flaherty as the official who ought to be held responsible for ensuring that this remains true.

Speaking in the wake of a surprisingly strong home-construction report for December, central bank advisor David Wolf said it’s “premature” to talk about a bubble in Canadian housing markets.

But he pointedly noted that there’s no chance of an early jump in interest rates to cool the country’s red-hot housing market. This would also throw cold water on the whole economy, including many sectors that are struggling.

Instead, Wolf suggested, it’s up to regulators – supervised by Flaherty – to use more targeted methods to cool the housing market if necessary.

Actually, the trend so far is merely a vigorous return to something like normal.

Resale prices have rebounded to near their pre-recession peak and now home construction is expanding rapidly in response to reviving prices, helping to create jobs and ease a shortage of homes for sale.

Yesterday’s news that December home construction actually exceeded the year-earlier pace was much more positive than expected. Homebuilding, which uses lots of local labour and materials, is a potent shot in the arm for economic activity, which is exactly what Canada needs as it recovers from a recession.

Home construction will prove to be a strong contributor to Canada’s growth not only in the fourth quarter, but through the coming year, believes Robert Kavcic of BMO Capital Markets.

So why the worry about a bubble? Because housing demand has been growing so much faster than supply that prices are rising much too sharply. When prices go up more steeply than incomes for very long, they’re cruising for a fall.

But what’s a person to do? Today’s very low interest rates make homebuying nearly irresistible for anyone who put off buying during the recession or who was considering a purchase in the coming year. Better to buy now and get bargain mortgage payments than wait until late in the year and pay a higher interest rate.

There are two possible correctives to this situation. First, pricing could level off naturally as potential sellers rush to list homes in the spring, boosting supply (homebuilders will also help, but they can’t work fast enough to meet today’s blazing demand).

But second, the government must prepare to step in. That’s where Wolf’s comments come into play.

It was under Flaherty that Canada went a little too far toward the kind of lax regulation that brought catastrophe in the U.S. real-estate market. Ironic, since the finance minister has risked shoulder cramps patting himself on the back so vigorously for Canada’s ability to escape a housing and bank collapse through wise regulation. He’s right, but the wisdom mostly preceded him.

One of his sillier excesses has already been reined in, with Flaherty pulling back on the maximum mortgage amortization period from his original 40 years to 35. He might now be considering whether 30 is a better number. The old standard was 25, but a longer period lets a buyer spend more by spreading out payments longer.

That opens up home ownership to middle-income people in very costly markets like Vancouver or Toronto, which might be good, but it also pushes prices still higher in all markets by enabling people to get even deeper into debt.

Does it really make sense to facilitate the kind of debt that stretches out for so many decades that it can’t be paid off in the lifetime of a middle-aged borrower?

Another dubious innovation, points out economist Derek Holt at Scotia Capital Markets, was the opening up of insured mortgages to folks who are buying a home, not to live in, but to speculate on.

Easy financing for so-called “investment” purchases of homes – often condominiums – was a recipe for disaster in markets like the U.S., Britain and Australia, Holt notes. Now we’re making it easier for Canadians to do the same kind of speculative buying.

When you have an insured mortgage, you are allowed to provide a very small down payment – just five per cent instead of the typical 20 per cent – making it far easier to buy.

That made sense in a program originally intended to help those of modest means buy a first home. It’s a lot harder to justify using the same program to lure amateur investors into dangerous speculation in an overheating market.

About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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