Firm foundation

Prudent action prevents creation of housing bubble

Canada’s housing market has begun to weaken recently and, if it continues to soften, Canadians can be assured that before too long those who have an interest in only good-news headlines will complain how policy changes in Ottawa took away the housing party punch bowl too early.

We note that such voices began their histrionics when federal Finance Minister Jim Flaherty started to ratchet back insurance coverage for extended amortization periods a few years ago. When insurance was reduced to 25 years this past summer (from 40 years several years back), selected voices in Canada’s housing and mortgage industry cautioned Flaherty not to “overdo it.”

But such sources are always suspect given that those same interests signs too about easily governmentignore warning created housing bubbles, which is exactly what guarantees for 40-year amortization periods were producing. They learned little from south of the border, where easy lending encouraged by government is what helped foment the U.S. housing bubble and its disastrous results.

More positively, the responsible voices in the financial sector have linked Ottawa’s action to a moderation in the housing market, but see that as positive, which it has been. If too many Canadians are taking on evermore debt, that’s high-risk behaviour in a still uncertain global economy.

Perhaps that’s why, in its recent announcement of its quarterly earnings, the Bank of Montreal endorsed Ottawa’s actions. “We believe the changes to Canada’s mortgage market announced earlier this year . . . and ongoing efforts to encourage Canadians to borrow smartly, are having the desired moderating effect on housing prices in most markets,” said BMO chief executive Bill Downe.

Meanwhile, the Bank of Canada, in last Tuesday’s announcement that it will hold its overnight target rate at one per cent, also took note of the decline in housing activity from historically high levels, though the central bank said it is too early to say whether “moderation” in housing activity and credit growth will be sustained.

In bank-speak, “moderation” is code for slow down, which as the bank notes, happened economywide in Canada in the third quarter of this year.

Canadians should understand the usefulness of both the Bank of Montreal’s endorsement of federal actions to take some of the froth out of the housing market, and the Bank of Canada’s subtle hints that the world economy, and Canada’s, still faces significant risks. What both institutions are communicating is the need for prudence: to avoid excessive debt, in particular.

It is a message that Albertans, in particular, might heed. Our housing market is still robust compared to Toronto or Vancouver, where sales have dropped and prices have started to fall, albeit modestly. Alberta is not immune to world markets, and in fact, is rather exposed on the only items that have been holding up much of the world economy: resources.

Thus, if the U.S. does not resolve its fiscal cliff — and we predict that it will — or if Canada’s access to markets is not granted soon through new pipeline construction, Albertans too might find that even softer prices for our major export, oil, take some wind out of our sails, housing and otherwise.

But the prudent measures taken by the federal government at least mean we will not hear that sickening sound of a popping housing bubble.