Feds ignoring bigger picture

Feds ignoring bigger picture



I don’t disagree with one aspect of the decision by federal Finance Minister Jim Flaherty and his cronies to have homebuyers put more of their own money into the process.

I’ve always figured that the more of their own money that people have to put toward buying a home, the better it would be — it’s something called pride of ownership.

It does mean that people might have to save a little longer to gather together the down payment, although it doesn’t rule out relatives such as parents providing some of the cash.

Flaherty recently came out with plans to toughen up measures on mortgages.

The plan says borrowers will have to be able to qualify for a mortgage at a five-year fixed rate level instead of the three-year rate required now.

For those refinancing a mortgage, only 90 per cent of the value of the home can be withdrawn, down from the current 95 per cent.

One final element: Flaherty says he will require a 20-percent down payment on government-insured mortgages for properties bought for speculation.

As always, there are pros and cons to the plan. But in the long run, the more of one’s own money in a home, the better it is.

People tend to care more about things when they have their own money at stake.

What I don’t like about Flaherty’s announcement is the fact he says he’s doing this to prevent a housing bubble from forming.

Vancouver and Toronto are the largest — and among the most expensive — cities in Canada to buy a home, so Flaherty has looked at them as the premise for establishing his new strategy.

As the grip of the economic downturn eases, these two cities have shown the largest rebound in MLS sales, pushing up the national average.

Flaherty has looked at these markets and then gone ahead, unfairly painting every market in the country with the same brush.

How about a quick peek at what has been happening with real estate in the Olympic host city and Hogtown?

Vancouver’s average resale price was hit by the downturn and was sitting at a three-year low of just over $510,000. But by the end of last month, it had jumped 25 per cent to well over $637,000.

In Toronto, the average sat at more than $343,000 in January 2009, but climbed 19 per cent a year later.

The Flaherty camp was focusing on the short-term rebound from trough to peak, instead of looking at longer-term trends. Even the Bank of Canada says it’s “premature” to talk about a bubble, saying that recent price increases “do not appear to be out of line” with supply-demand fundamentals.

Also, with housing construction starts below long-term demographic requirements, inventories are still declining.

“It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors — notably the historically low borrowing costs as well as pent-up demand and pulled-forward demand,” the central bank says in a statement.

Let’s take a look at another strong market — Calgary. Prices here are moving along at a more leisurely pace.

In January of last year, the average price hit a 25-month low of just over $362,000 — higher than the Toronto price for the same month. A year later, the price had only moved 5.5 per cent.

No problem here. We have an orderly market that favours neither buyer nor seller. Price increases are more modest over the 12-month period and are aligned with healthy demand and a lower inventory of homes. Come spring, though, inventory is expected to ramp up.

The Canadian Real Estate Association is also suggesting the basis for bubble talk isn’t broad enough, centering mostly on Van and TO. “The extraordinary decline in activity one year ago and subsequent rebound … is stretching current year-over-year comparisons,” it says.

CREA also says that by the second half of this year, price gains are likely to “shrink significantly” because a year will have elapsed since the decline and rebounds previously mentioned.

But there are those who will argue the real estate market is having problems.

“From their trough in 2007, the most sustainable path for Canadian home prices would have been a gradual and modest uptrend aligned with nominal income growth,” says TD Economics.

“But now that home values are already past their previous peak in such short order, we estimate that the typical home remains overvalued by 12 per cent at the national level. Unfortunately, sheer momentum suggests that this over-valuation is likely to increase over the course of the next few quarters, peaking at 13 to 15 per cent in the first half of 2010.”

But we can talk all we want about bubble or no bubble, higher down payments or not, or beefier qualifying elements — it won’t do any good. Finance Minister Flaherty has spoken: now everyone buying or remortgaging will pay the piper.


Posted via web from Toronto Real Estate News | Blog


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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