Canada's Housing Bubble

Dec 29, 2009 Jeff Nagel Tri-City News

A senior B.C. economist is warning the Lower Mainland's recovering real estate market and construction industry will both take a hit if Ottawa makes it harder for first-time home buyers to get mortgages.

Helmut Pastrick of Central 1 Credit Union was responding to federal finance minister Jim Flaherty, who said the government will "likely" boost the minimum down payment from the current five per cent and cut the maximum mortgage term down from 35 years to ward off a potential housing bubble in Canada.

"It would have quite a negative impact," Pastrick said. "It would certainly soften the real estate market. There would also be less new construction over time."

A higher down payment threshold would force many first-time buyers with insufficient cash to delay buying.

Shorter maximum terms could mean higher payments, trimming the price first-timers can afford to pay.

Pastrick said such measures would slow the construction industry just at the critical time when the sector is needed to power up the region's still fragile recovery.

"We need to see this recovery in housing construction extend all through next year and even beyond," he said. "We don't want to snuff it out at this early stage."

A run-up in real estate activity is being fueled by extremely low interest rates that were slashed to encourage consumer spending and fight off the recession.

But Pastrick says the current record low rates will soon begin to rise and that will have a dampening effect on real estate.

He said Flaherty's threat of tighter mortgage rules could actually spur more people to buy at the limit of what they can afford before new restrictions kick in.

Assuming they lock in at current rates, he said some of those buyers face "interest rate shock" three to five years from now when their mortgages roll over at what may be sharply higher rates.

Greater Vancouver Home Builders' Association CEO Peter Simpson also opposes federal intervention.

"We're just starting to see some semblance of a recovery," he said. "We don't need to hinder that."

Builders cancelled projects and laid off workers during the downturn and are now ending 2009 with the lowest number of new home starts in several years.

Simpson said he expects rising mortgage rates will restrain buyer demand.

Buyers will also pay more for homes worth at least $525,000 when the Harmonized Sales Tax takes effect.

"My concern is that if by June we have higher interest rates and on July 1st the HST, it could combine to create the perfect storm of buyer resistance on its own," Simpson said. "We don't need other mechanisms."