Canada's Housing Bubble

April 06, 2010 Andy Holloway Financial Post Magazine

Apply The Law Of Unintended Consequences To The New Mortgage Rules And The Picture Isn't Pretty

On the surface, Ottawa's new mortgage rules are intended to legislate against people making bad decisions, such as buying too much house with too little money, as well as reduce the line-ups of pre-build condo speculators in Vancouver and Toronto. But if the new rules work, the unintended consequences could be dire, warns Don Campbell, president of the Real Estate Investment Network, an association of investors based in Calgary whose members own more than $3 billion worth of property.

The most noticeable effect will be a loss of construction jobs. Builders that can't secure a certain percentage of pre-sales won't be able to get the necessary financing to put up their condominiums, says Campbell. And the changes come just two months before the Harmonized Sales Tax comes into affect in Ontario and British Columbia.

But even if you're not a buyer or a builder, you'll soon notice a change: higher rents, Campbell says. Typically when condo speculators get stuck with units they can't sell, they are thrown into the rental pool, which moderates rents since little new supply is being built. "Financially, it makes zero sense in just about every major city across Canada to build a rental-specific apartment building," says Campbell. "You just can't get a big enough ROI."

But perhaps the worst effect will be a rise in mortgage fraud as investors figure out ways around the new rules. "You're going to see the crooks and the creeps show up and that's not good."