Andrew Coyne – National Post

All eco­nomic news is bad, as the say­ing has it. But all news about the hous­ing mar­ket is hor­ri­ble, calami­tous, ter­ri­fy­ing. Prices are ris­ing? It’s a bub­ble! This can only end in tears! Prices are falling? See? What did I tell you! Prices nei­ther ris­ing nor falling? They’re poised to start rising/falling again!

Should we be wor­ried about the hous­ing mar­ket? A lot of peo­ple think you should be, almost always based on the same, shock-horror sta­tis­tics: the aver­age house price in Canada has dou­bled since 2001; the aver­age Cana­dian house­hold is car­ry­ing mortgage-fueled debt equal to 165% of income.

Some com­menters even claim the Cana­dian hous­ing mar­ket is head­ing for a U.S.-style bust. A report for the invest­ment analy­sis firm Morn­ingstar says Cana­dian banks’ expo­sure to the hous­ing mar­ket is “eerily sim­i­lar” to that of U.S. banks before the collapse.

Yet the hous­ing mar­ket stub­bornly refuses to coop­er­ate. The best word to describe the mar­ket nowa­days is sta­ble, or at least sta­bi­liz­ing. Sales have fallen off quite a bit from the fre­netic pace of a year or two ago. Price increases have tapered off to less than 2% annu­ally, a third their pre­vi­ous pace. Ter­ri­fy­ing, indeed.

Look, it’s good news that the Canada Mort­gage and Hous­ing Corp. has stopped insur­ing mort­gages with 40-year amor­ti­za­tions, trim­ming them back to 25 years; the Office of the Super­in­ten­dent of Finan­cial Insti­tu­tions would be wise to do the same with unin­sured mort­gages, as it is report­edly con­sid­er­ing. This is no more than the restora­tion of pru­den­tial norms that should never have been relaxed.

But it’s still hard to see where a hous­ing mar­ket col­lapse would come from. Employ­ment growth has been steady. Incomes are ris­ing. And while Cana­di­ans have been tak­ing on more debt they’ve also been aquir­ing more assets.

Most impor­tant, what­ever the hype about over­heated mar­kets, by the stan­dard mea­sures hous­ing remains afford­able — more afford­able, in fact, than at any time in the last 30-odd years. Bank of Canada fig­ures show the ratio of mort­gage costs (prin­ci­pal plus inter­est) to dis­pos­able income at 26%, about where it has been since 1997. In the early 1990s, it was more than twice that.

Of course, that’s only because inter­est rates are so low today, with five-year mort­gages avail­able for less than 3%. But they’d have to rise quite a long way before many house­holds would run into trou­ble – and stay there – to have any effect on those with fixed-rate mortgages.

Com­ment: Like I wrote it myself… one of the very few smart peo­ple speak­ing facts and truth, not spin­ning neg­a­tiv­ity from nothing.

Well, okay, there’s always a risk. But where would that sus­tained spike in inter­est rates come from? Infla­tion is low, and shows no sign of reviv­ing. Pub­lic debt is at rel­a­tively safe lev­els, at least in the short term. Indeed, there would seem lit­tle dan­ger of an inter­est rate spike, so as long as we leave the dol­lar alone — that is, so long as we con­tinue to let it float where it may, rather than try­ing to hold it to some tar­geted exchange rate.

Huh? What have mort­gage rates got to do with the value of the dol­lar? And why am I bring­ing this up now? The float­ing dol­lar has been the pol­icy, after all, for many years, and is broadly seen as a suc­cess. Why would any­one want to mess with it?

Here’s why they might. The biggest sin­gle infla­tion risk in the world today is the United States, where for the past four-and-a-half years the Fed­eral Reserve has been on an unprece­dented asset pur­chas­ing spree, as its cho­sen means of pump­ing money into the econ­omy. Since the finan­cial cri­sis of 2008, the Fed’s bal­ance sheet has roughly tripled in size, to more than $3-trillion.

So far this has not pro­duced the out­break of infla­tion one might ordi­nar­ily expect. It might never do so, so long as the Fed with­draws that liq­uid­ity — sells off those same assets — in time. But an asset sale on that scale, like the pro­gram that pre­ceded it, has never been tried: pub­lished com­ments from Fed offi­cials reveal a high degree of uncer­tainty on how to proceed.

Sup­pose they muff it. It wouldn’t be the first time a cen­tral bank had been too cau­tious, too slow to undo what it had done. Only the con­se­quences this time, with so much money in the sys­tem, could be severe: not the hyper­in­fla­tion of some jere­mi­ads, but cer­tainly much higher inflation.

What does this mean for Canada? Other things being equal, higher U.S. infla­tion would mean a higher Cana­dian dol­lar — with so many U.S. dol­lars on the mar­ket, they would fetch rel­a­tively fewer Cana­dian dol­lars. At near par­ity, the Cana­dian dol­lar is already con­sid­ered “high,” cer­tainly if you are, say, a man­u­fac­turer in Ontario. What would be the effect of a fur­ther 10% or 20% appreciation?

Now sup­pose you are, say, the Finance min­is­ter in a cer­tain fed­eral gov­ern­ment, need­ing the sup­port of Ontario vot­ers to win re-election. Might it not occur to you that this was too high a price to pay, that man­u­fac­tur­ers and exporters had already suf­fered enough? Might it not also occur to the Bank of Canada gov­er­nor you had just appointed?

But the only way to keep the dol­lar from ris­ing would be to match U.S. mon­e­tary pol­icy — essen­tially, import­ing U.S. infla­tion. And the first and surest con­se­quence of higher infla­tion is higher inter­est rates. Now do you see the con­nec­tion to the hous­ing market?

Per­haps I’m mak­ing too much of this, but there are already straws in the wind. The “Dutch dis­ease” dis­cus­sions were an early warn­ing sign, as is the spec­u­la­tion sur­round­ing the new governor’s lean­ings. A recent paper from the Ontario-based Mowat Cen­tre — the title, “More Sta­bil­ity, Please,” says it all — may hint at where debate is headed.

That’s worth wor­ry­ing about. If there is one sure way to turn the house­hold debt prob­lem into a rag­ing cri­sis, it would be to aban­don our infla­tion tar­gets in pur­suit of exchange rate “sta­bil­ity.” Let’s not, shall we?

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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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