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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