Ottawa’s housing policy runs risks
The fourth change is where the government overshot the mark
E conomist Will Dunning says he’s taken a close look at the Canadian housing market and just can’t see the bubble.
But what’s most disconcerting to him about the concern about the housing market expressed by economists, media and government officials is it has led to action from the federal government to change mortgage rules on four separate occasions — something he says the market didn’t need.
The meddling has created a “dangerous” situation that might ultimately derail the housing market, which will impact jobs and ultimately gross domestic product, says Mr. Dunning in a paper to be released Wednesday.
“The deliberate reduction of housing demand, which is now clearly visible in the new and existing arenas [for housing] creates a risk that prices could fall, unnecessarily. Once prices start to fall, the outcome is unpredictable,” said Mr. Dunning, who also serves as chief economist for the Canadian Association of Accredited Mortgage Professionals.
Federal government policy has been aimed at cooling off the overall housing market, but it’s usually only certain segments of the country that are on fire. In Vancouver, many believe the market has been influenced by external factors, such as foreign investors, while Toronto’s booming single-family home market is now seeing shortages in supply that commentators blame on municipal and provincial land-use policies.
“You always hear these comments that the minister is watching Vancouver and Toronto. Well, between them, Vancouver and Toronto are less than a quarter of Canada’s housing market,” Mr. Dunning said. “Look at what is happening in the rest of the country, Ottawa and east and those markets are really on the edge.”
Mr. Dunning argues neither Toronto nor Vancouver probably needed the latest rule changes, which included the reduction of the maximum amortization length from 30 years to 25 years — something that increased monthly payments and lowered the size of the mortgage consumers could get.
“I think the fourth change is where the government overshot the mark,” Mr. Dunning said.
On a national basis, he says the ratio of rental rates to home prices has a large enough gap that house prices could rise 20% to 25% in the next two years and still make home ownership a viable option.
The economist says affordability statistics are skewed because data is based on posted rates that are much lower than what consumers are able to negotiate on their loans.
“Canadian housing prices leave a substantial amount of room to tolerate higher interest rates,” Mr. Dunning said.
Not everyone agrees with him. Marc Pinsonneault, an economist with National Bank of Canada, said tighter mortgage rules have had an impact on every market and feels that’s as it should be.
“You can’t blame the overconstruction in Quebec on the federal measures,” Mr. Pinsonneault said, adding that Ottawa probably still has concerns about high levels of unsold inventory in Toronto’s condominium sector.
He said any worries about a policy that might affect some parts of the country more than others competes with a feeling that construction has become too important to GDP.
“The industry might be overweight in its current proportion and will return to its normal proportion. Returning to equilibrium is not something that is bad to me,” Mr. Pinsonneault said. “You don’t want a sudden loss of value and such a scenario is not in the cards.”
Finn Poschmann, vice-president of research at the C.D. Howe Institute, said it is “not the job of mortgage insurance to encourage or discourage whatever is the underlying trend in house prices — the job is to manage financial risk exposure.”
Most of the government restrictions relate to loans with mortgage default insurance, which is mandatory with less than a 20% down payment.
“They did tighten mortgage policy, and it was because housing credit was growing fast and there were concerns (about) overexposure. That’s across the board, not a regional issue. The sandbox rules are national — and they are not tuned to local markets any more than are, say, bank capital ratios or Bank of Canada interest-rate policy. They are blunt tools, and not meant for market fine-tuning,” Mr. Poschmann said.