Canada's Housing Bubble

Dec 18, 2010 Myke Thomas Calgary Sun

Imagine the chocolate industry in Canada was in financial trouble and attempted to recover by lowering the cost of chocolate.

And then, a year or so later, imagine the industry is recovering but issues a warning too much chocolate is bad for you, so cut back a bit, or suffer the consequences.

But the industry doesn’t raise prices to previous levels, knowing that would put it back in financial trouble.

That’s pretty much what the Bank of Canada has done with its lending rate since the recession arrived two years ago.

The rate is historically low so people will borrow money to spend in the marketplace to bolster the economy.

But Mark Carney, governor of the bank, has expressed concerns the debt-to-income ratio of Canadian households is approaching 150%, higher than the ratio south of the border.

“Household debt in Canada is now at a record high, is now higher than it is in the United States,” said Carney.

“At a minimum ... we have to think about what the implications of this are for how the economy performs if there is an adjustment to housing prices. Because then the wealth is less … and what’s the impact of that on consumption in Canada.”

The increased ratio comes after a home-buying frenzy late last year and early this year as Canadians bought to beat the implementation of new mortgage regulations in April and to get ahead of expected mortgage rate increases (which haven’t materialized).

Activity was especially high prior to July 1 in Ontario and B.C. which introduced Harmonized Sales Taxes, which added significantly to the cost of homes.

Certainly, it is part of Carney’s job to warn of the perils of high household debt and the warning should be heeded, but it doesn’t appear to be a bubble that is about to burst.

Finance minister Jim Flaherty said the government would tighten mortgage rules if needed, but he was not worried enough to take immediate action.

“There is no reason for extreme concern now. There is reason for concern, so I watch,” he said in Ottawa.

“Part of what I have to do is balance the amount of credit we see out there with the job creation that we see in the economy as well.”

It sounds eerily similar to this time last year, when Carney and Flaherty warned of an imminent housing bubble forming, suggesting stricter mortgage qualifying criteria might be needed to cool the housing market.

The new warning is based on an expectation of increased interest rates in the future, although no one is certain when. There is speculation the bank will not raise its overnight rate until May, which would affect only variable rates, not fixed.

Lending institutions have already tightened their mortgage qualification rules beyond those the government imposed in April — Carney and Flaherty need to remember what happened when those regulations were announced.

It started a buying spree that increased the debt-to-income ratio.

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