Government is to blame for Canada’s housing bubble
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.
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