Canada's Housing Bubble

Feb 17, 2010 Adrian MacNair National Post

Federal Finance Minister Jim Flaherty has announced new rules to reduce the risk of homebuyers getting into financial difficulty when interest rates rise. The move is also aimed removing speculators from the housing market, and while it’s not as interfering as I had feared, it’s not exactly welcome either.

“There is no evidence of a housing bubble, but we’re taking prudent steps today to prevent one,” he said at a news conference in Ottawa Tuesday. “If some lenders aren’t willing to act themselves, we will act.”

This is your free market Conservative Party in action, folks. As for no evidence of a housing bubble, I would tend to disagree.

The Canadian Real Estate Association says that the 12% HST in British Columbia will move the housing bubble forward, so that home-buyers will buy before the HST kicks in, meaning fewer purchases in late 2010 and early 2011.

B.C.’s housing resale market is forecast to jump 19.8% for 2010, with average home prices to go up by 4.2% to $485,500. But the bulk of those sales will be before the HST and the Bank of Canada interest rate revisions.

Interest rate increases are likely to further dampen the housing market in 2011, with an expected decline of 7.1% in the number of units sold. B.C.’s market is forecast to see the largest decline of 12.9% to 88,800 units sold in 2011.

Ottawa’s new plan to save us from our own bad house-buying decisions is a three-pronged approach.

1. It will require all borrowers to meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.

2. The rules will lower the maximum Canadians can withdraw when refinancing their mortgages to 90 per cent of the value of their home, from 95 per cent.

3. It will now require a minimum 20 per cent down payment to qualify for CMHC insurance for non-owner-occupied properties purchased as an investment.

The good news is that the minimum down payment will remain fixed at 5%, and the amortization period at 35 years. But don’t count out the Conservatives from future interference in the market.

All in all, I don’t think the moves are particularly disruptive, like a change to the minimum down payment would be. But it’s clear that the government now feels that it’s personally responsible in overseeing the stability of the housing market, a plan that seems contradictory to the expected HST effect.

My first impression on changes to regulations are that home-buyers who really want to buy a house will find a way to make it happen, even if that means increasing their own debt burden. The massive debt burden is a primary problem, facilitated partly by regulations which more or less force you to go into it, and partly by ease to access.

Average Canadian household debt has reached $96,000, with mortgage payments that were at least 90 days late up 50% from 2008. But the study acknowledges that first-time home buyers have taken advantage of record low interest rates to push the housing market back into the black. The same low interest rates that is spurring on economic recovery is being cited as the problem, but that was the whole point of restoring confidence in financial markets.

Adrian MacNair is a Vancouver-based writer and blogger. Read more here.