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Housing credit squeeze likely to keep bubble at bay

By David Olive – Toronto Star

Finance Min­is­ter Jim Fla­herty has headed off any last chance of a hous­ing bub­ble devel­op­ing in Canada.

Com­ment: No one but The Star thought there was any chance of a bub­ble any­way. You just threw the words around because it made for good press. All of the data sup­ports the exact oppo­site. Look at the num­bers from 1988–1991 ver­sus 1996–2010 and notice that they are not at all alike. Peo­ple – do not believe the hype, check the data for your­self and come to your own con­clu­sions!

Not that there was much like­li­hood of a bub­ble form­ing
, despite the aston­ish­ing recov­ery in Cana­dian house prices in recent months, fuelled by pent-up demand and record-low inter­est rates. The fears on that score are overblown. So are those of a crash in prices when the non-existent bub­ble implodes.

Here’s why the Cana­dian hous­ing mar­ket is head­ing into a period of stability:

Ottawa has just sig­nalled it will slam the brakes on the real estate mar­ket if it shows signs of spin­ning out of control.

Mortgage-tightening rules Fla­herty unveiled Tues­day are gen­tle and highly tar­geted. They’re aimed at dis­cour­ag­ing Cana­di­ans from using their homes as ATM machines. And to make life dif­fi­cult for spec­u­la­tors who buy six-packs of condo units in the hope of flip­ping them for a quick buck.

That activ­ity dri­ves up hous­ing val­ues across the board, fos­ter­ing the illu­sion of a sus­tain­able rise in demand and prices that, in fact, is built on sand. These were cul­prits in the record run-up in U.S. hous­ing val­ues in the pre­vi­ous decade that ended with an epic col­lapse, as U.S. house prices abruptly plunged between 40% and 70% from their 2007 peak.

If Flaherty’s new mea­sures don’t ease house-price infla­tion, he’ll reach deeper into his tool­box for a mal­let, and now every player in the mar­ket knows it. Fla­herty said Cana­di­ans can with­draw only 90% of the value of their homes when refi­nanc­ing, down slightly from the cur­rent 95%. In the next round of dis­ci­plin­ing the mar­ket, if required, Ottawa can drop that amount to 85% or still lower.

Ottawa will now require a 20% down pay­ment on government-insured mort­gages for what it describes as “spec­u­la­tive” invest­ment properties.

Real estate agents, mort­gage bro­kers and even some econ­o­mists feared Ottawa might apply that 20% require­ment on all hous­ing pur­chases. That could dampen not only real estate val­ues, but also the wider eco­nomic recovery.

But Ottawa has bared its teeth: If the upward spi­ral in prices con­tin­ues, Fla­herty might broaden the appli­ca­tion of the higher down pay­ment require­ment to, say, prin­ci­pal residences.

The Canada Mort­gage and Hous­ing Corp., the prin­ci­pal insurer of Cana­dian home mort­gages, already has tight­ened its rules on approv­ing insur­ance on mort­gages that show the slight­est poten­tial for default. And it has elim­i­nated non-down-payment mortgages.

One of the clas­sic char­ac­ter­is­tics of a bub­ble is that in the midst of one, no one thinks it’s a bub­ble. If they did, they’d quickly clear their win­nings off the table. That fears of an emerg­ing Cana­dian hous­ing bub­ble have pre­oc­cu­pied econ­o­mists, lenders, pol­i­cy­mak­ers and buy­ers since last fall is a sure indi­ca­tion that the mar­ket is not caught up in an irra­tional buy­ing frenzy.

There has been lit­tle spec­u­la­tive activ­ity in the hous­ing mar­ket. This dan­ger­ous phe­nom­e­non shows up in vol­ume as much as prices, as the num­ber of trans­ac­tions soars with the ram­pant buy­ing of non-owner-occupied homes. Yet in this mar­ket, as prices have risen strongly, vol­ume has been close to flat.

The hous­ing mar­ket is about to endure two cold show­ers. The Har­mo­nized Sales Tax (HST) will kick in July 1 in Ontario and B.C., two of the biggest and most buoy­ant mar­kets. And the Bank of Canada’s low-low inter­est rates – the main cause of today’s robust prices – are expected to rise this year.

The fun­da­men­tals of our econ­omy don’t sup­port another leap in prices.

No ques­tion, the Cana­dian hous­ing mar­ket has recov­ered with star­tling speed and strength. From the trough a year ago last month, aver­age Cana­dian home prices have soared 23%, in the teeth of a global reces­sion with no equal in mod­ern times. The aver­age Toronto house price has jumped 19% in the past year, to $409,058 last month.

But Cana­dian per­sonal income slipped 1% in 2009, and total employ­ment was down 1.4% from 2008. And in a report Tues­day, the Ottawa-based Vanier Insti­tute of the Fam­ily warned that Cana­dian house­hold debt reached a record aver­age of $96,000 last year. The inci­dence of late mort­gage pay­ments soared 50% in 2009, and credit-card hold­ers at least three months behind in their pay­ments was up 40%.

Under those cir­cum­stances, deferred grat­i­fi­ca­tion will trump irra­tional exu­ber­ance in most dinner-table dis­cus­sions of fam­ily finances.

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Con­tact Lau­rin Jef­frey for more infor­ma­tion  -  416−388−1960

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  • 3 Responses to Housing credit squeeze likely to keep bubble at bay

    1. Virginia Guess says:

      Let me begin by say­ing I have long­time reader, first time com­menter. I fig­ured I might as well say thanks for post­ing this piece (and all your oth­ers), and I’ll be back!

    2. Good thing you have done here, Thanks! This is a pretty up beat post about real estate that I am quoted in.

    3. Nataly says:

      In a hot mar­ket some con­sumers pre­fer less expen­sive options than hir­ing real­tors… In fact, the Com­pe­ti­tion Bureau intends to take CREA to the Com­pe­ti­tion Tri­bunal because it believes that CREA’s con­trol over the MLS lim­its con­sumer choice… Which is actu­ally arguable because there are plenty of ser­vices and options avail­able to those who do not want to use an Realtor.

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