Jesse Kline – National Post

Canada’s hous­ing mar­ket has been rel­a­tively sta­ble over the past year, with the notable excep­tion of Toronto, which has over­taken Van­cou­ver as the country’s hottest real estate mar­ket. Prices in Canada’s largest city have risen 10.5% over the past year and there are now three times as many cranes dot­ting Hogtown’s sky­line as there are in the Big Apple.

Many ana­lysts are becom­ing increas­ingly con­cerned that some cities — notably Toronto, Van­cou­ver and pos­si­bly Cal­gary — are in the midst of their own U.S.-style hous­ing bub­ble. A doc­u­ment writ­ten by the country’s finan­cial reg­u­la­tor and obtained ear­lier this year through an access to infor­ma­tion request, expresses con­cern over the “emerg­ing risk” of Cana­dian loans that “have some sim­i­lar­i­ties to non-prime loans in the U.S. retail lend­ing mar­ket.” Bank of Canada Gov­er­nor Mark Car­ney con­tin­ued to sound the alarm as well last week over the grow­ing level of house­hold debt, while main­tain­ing the overnight lend­ing rate at a near-record low level of 1%.

Com­ment: Huh, what? We have loans that look like sub-prime ones? Seri­ously… No, we don’t. Well, we do – we have about 0.2% of our mort­gages in that sort of area. As in 2 out of 1,000. That does not weigh very heav­ily on my mind, nor should it on yours.

The ques­tion remains as to why prices in Toronto and Van­cou­ver — where the econ­omy is stag­nant — are ris­ing so fast, and not in cities like Edmon­ton and Saska­toon — where the econ­omy, and pop­u­la­tion, is boom­ing. Finan­cial Post colum­nist Diane Fran­cis caused quite a stir recently, by argu­ing that the Canada Mort­gage and Hous­ing Corporation’s (CMHC) poli­cies have led to a “del­uge of hot money from abroad that is cre­at­ing an arti­fi­cial and poten­tially dan­ger­ous real estate bub­ble.” Her solu­tion: “A ban on for­eign buy­ing of residences.”

Com­ment: Wrong. Toronto’s econ­omy is any­thing but stag­nant. Incomes are ris­ing and we are the cen­ter of the app devel­op­ment world. There is a rea­son 110,000 peo­ple immi­grate to this city every year. Vacancy rates are low, home own­er­ship rates are high. There is a lot of money in Toronto and it grows every year.

Ms. Fran­cis is at least par­tially cor­rect. The CMHC con­trols a major­ity of our mort­gage insur­ance and secu­rity mar­kets, and guar­an­tees 100% of the prin­ci­ple and inter­est on insured res­i­den­tial mort­gages. Mean­while, the Bank of Canada has main­tained inter­est rates at arti­fi­cially low lev­els, which only serves to tem­porar­ily inflate the mar­ket, instead of allow­ing any cor­rec­tion that would take place under nor­mal mar­ket con­di­tions. These two poli­cies make Cana­dian real estate a very attrac­tive invest­ment — for both for­eign and domes­tic buyers.

Com­ment: The BoC has kept the prime rate low, which affects vari­able rate mort­gages. It does not influ­ence fixed rates. That is the bond mar­ket, which the gov­ern­ment does NOT con­trol. And the mar­ket was boom­ing as much as it is now a few years back, when rates were higher. In fact, 2007 still stands as the record year for sales vol­ume – when mort­gage rates hit 6.75%. So it ain’t rates baby!

But say­ing that for­eign­ers are wholly respon­si­ble for cre­at­ing a hous­ing bub­ble is noth­ing more than fear-mongering, with peo­ple who don’t look or sound like us, being cast as the boogey­man. After all, what’s wrong with for­eign invest­ment? For­eign­ers bring money into the coun­try, which cre­ates jobs and drums-up busi­ness here at home. Devel­op­ers make money, con­struc­tion com­pa­nies hire employ­ees and buy cap­i­tal equip­ment, the rental sup­ply increases and local busi­nesses profit the whole way through. It’s a win-win for everybody.

Com­ment: The for­eign money is going more into $300,000 new con­dos from builders. That is cer­tainly not push­ing prices up in any appre­cia­ble way. The Buga­boo mafia and their stab-you-in-the-eye bid­ding wars are the main dri­ver of prices increases in Toronto. One bun­ga­low in North York does not a trend make. And the very idea is racist and wrong and offends me to my core.

The Statue of Lib­erty calls for “your tired, your poor, your hud­dled masses.” If we were smart, we’d engrave the CN Tower with a call for “your inno­va­tions, your money and your wealthy investors.” We should want to be known as a coun­try that wel­comes investment.

Com­ment: We are – and look how it ben­e­fits us!

What we don’t want is an arti­fi­cially inflated hous­ing mar­ket that will bring the whole econ­omy crum­bling down when the bub­ble bursts (see the United States, circa 2008). But if some parts of Canada are indeed in the midst of a hous­ing bub­ble, the blame can be placed squarely on gov­ern­ment policy.

Com­ment: But it is not arti­fi­cially inflated. Any­one who says that has noth­ing to back it up. To com­pare Canada or Toronto to the US of 4 years ago is mis­lead­ing and kind of dumb. They had sub-prime issues, we do not. They were bleed­ing money fight­ing wars, we are not. They were los­ing jobs, we are gain­ing. I could go on, but the only sim­i­lar­ity between them and us is the fact that we are noth part of North America.

By guar­an­tee­ing 100% of CMHC-insured mort­gages and 90% of pri­vately insured loans, the gov­ern­ment removes the risk from banks and investors, mak­ing it much eas­ier to get loans. And although the gov­ern­ment has tight­ened lend­ing stan­dards recently and may do so again in the near future, a report from the Rea­son Foun­da­tion in the U.S. found that gov­ern­ment guar­an­tees always under price risk, drive mort­gage invest­ment into unsafe mar­kets and inflate hous­ing prices by dis­tort­ing the allo­ca­tion of cap­i­tal. Gov­ern­ment sim­ply can­not price risk accu­rately; while pri­vate lenders, if unen­cum­bered by market-distorting poli­cies, have every incen­tive to price risk appropriately.

Com­ment: Easy to get loans? Are you seri­ous? Ask my clients how easy it is… Or go try it for your­self. Our banks are evil and stingy with their money. They really do make peo­ple jump through hoops and are very care­ful who they lend to. That is why our default rate is barely 1 in 1,000, if even that. Our bank­ing sys­tem is the envy of the world and our mort­gage sys­tem is solid as a rock.

In order to pre­vent a U.S.-style hous­ing bub­ble, we should not hang a “closed” sign on our bor­der and pre­vent inflows of cap­i­tal; we should instead push to pri­va­tize the CMHC and allow pri­vate com­pa­nies to assume the mort­gage risk, instead of the tax­payer. We also need a mon­e­tary pol­icy that allows inter­est rates to rise and fall with mar­ket forces, instead of at the whim of cen­tral planners.

Com­ment: Hear, hear! I like the idea of more pri­vate mort­gage insur­ers. We do have GEMI already, CMHC is not the only game in town (which this writer either ignores or does not know). But other insur­ers would soften the risk to the government.

Only by remov­ing poli­cies that arti­fi­cially inflate the mar­ket in the short term, will we be able to cre­ate a real estate mar­ket that is sus­tain­able in the long run.

Com­ment: What poli­cies are these? The prime lend­ing rate? That is the only thing the gov­ern­ment has con­trol of. The mar­ket is what it is because of the 1,000,000 buy­ers, sell­ers and their agents that exchange prop­er­ties every year in Canada.

—————————————————————————————————–
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.
—————————————————————————————————–

email vately com cn loc:US

Related posts:

1. Toronto Bub­ble Risk Tops New York in Con­dos Real­tors and oth­ers in the indus­try say the record condo…
2. What hap­pens when Canada’s hous­ing bub­ble pops? A bub­ble is char­ac­ter­ized by rapid increases in val­u­a­tions of…
3. Hous­ing credit squeeze likely to keep bub­ble at bay Not that there was much like­li­hood of a bub­ble forming,…
4. Why we STILL do not think there is a hous­ing bub­ble Those that insist there is a bub­ble point to the…
5. Toronto’s over­heated hous­ing mar­ket unsus­tain­able There’s an encour­ag­ing demo­graphic trend that’s likely to keep housing…