Housing finance rules pass the stress test
Stephen Dupuis – Yourhome.ca
I will admit that I read each and every news report about Bank of Canada Governor Mark Carney’s speech to the Vancouver Board of Trade last week to determine whether he was focusing solely on the Vancouver real estate market, where prices are eye-popping and continuing to rise quickly, or Toronto’s as well, where sales volumes are quite elevated but average prices are much lower and increasing at a more sustainable pace.
At the same time, I was paying close attention to federal Finance Minister Jim Flaherty’s musings because, let’s face it, these two fellows have all the power and tools to make or break housing markets across Canada.
Obviously the Bank of Canada controls interest rates, and anybody who remembers the days of mortgage rates exceeding 20% will appreciate the wonderful work the Bank of Canada did to wrestle inflation to the ground and keep it there.
With today’s mortgage rates, homebuyers have it very good indeed, but the problem the Bank of Canada has to deal with is what happens when rates rise: Will people still be able to afford their mortgage payments?
Reading Carney’s exact words on the Bank of Canada website ( www.bankofcanada.ca), I found the answer to my question in the second line of his speech where he states that in the past three years, the average Vancouver house price is up about 30%, making that city an “extreme example” of general developments in Canadian housing.
Carney notes that “the value of residential real estate holdings in Canada has climbed more than 250% in the past 20 years, vastly outpacing increases in consumer prices and disposable income over that period.” That’s a very good thing if you got in the game 20 years ago, or even 10 or five years ago. But if you’re looking to get into the market today, your starting point is so much higher.
Here’s where it get’s interesting. Carney reveals that the value of housing-related debt in Canada has nearly tripled over the past decade to $1.3 trillion. This debt is also the single largest exposure for Canadian financial institutions, with real estate loans making up more than 40% of the assets of Canadian banks, up from about 30% a decade ago.
On the up side, Carney notes that “this unprecedented exposure exists in the context of a Canadian mortgage market that is subject to more stringent checks and balances than in the United States. For instance, almost all Canadian mortgages are full recourse, mortgage interest is not tax deductible, and high-ratio lending standards are generally prudent. These factors help instill responsibility and discipline on both homeowners and lenders.”
This is where Flaherty enters the picture. He deserves credit for his pre-emptive strike against the types of mortgage financing practices that caused all the problems in the U.S. He acted before the global financial crisis and he has tightened the mortgage financing rules twice since then.
I gave Flaherty full credit for all three moves, but after his most recent restrictions I made the point that any further tightening would go beyond prudence and into outright market manipulation. On that note, I was delighted to read earlier this week that he “has no plans to tighten mortgage rules again.”
Both Carney and Flaherty are walking fine lines every day. They are trying to achieve sustainable housing markets without killing the goose that is laying the golden eggs, which is never an easy task.
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
- Carney urges ‘prudence’ in housing market Bank of Canada Governor Mark Carney is warning consumers not…
- Easy credit, soaring prices raise new housing fears Canadians are in the midst of a mortgage binge,…
- New mortgage rules kick in amidst hot housing market Finance Minister Jim Flaherty announced in February that Ottawa was…
- Housing Finance Throughout Canada, mortgage arrears remained low and mortgages remained available.…
- Mortgage rate hike could cool housing rebound By raising their mortgage rates and making it more expensive…