No bubble here, says report from mortgage industry

Organization warns of risks in changes to lending conditions

A Canadian mortgage industry group says there is no bubble in any Canadian housing markets and is warning the government against any changes in lending conditions that might derail the market.

Will Dunning, the chief economist for Mortgage Professionals Canada, which represents more than 11,000 members across the country, says everybody is waiting for the bubble to burst, but maintains there isn’t enough evidence to say it exists.

“There is a risk that changes in policies of lenders or mortgage insurers that reduce access to mortgages could cause an unnecessary drop in housing demand and housing prices, and bring consequent economic damage,” Dunning said, in a release on Tuesday that accompanies his group’s 38-page report on the state of the mortgage industry.

His comments come as federal Finance Minister Bill Morneau has called for a “deep dive” into the state of the housing market, including the impact of foreign ownership. Last week, Morneau announced a working group will be formed of federal officials, provincial representatives from British Columbia and Ontario and municipal counterparts in Vancouver and Toronto.

Morneau’s comments came after a torrid month for real estate in May for both Vancouver and Toronto. The composite index for all homes in Metro Vancouver rose almost 30 per cent last month from a year ago while average prices in the Toronto region were up almost 16 per cent during the same period from a year ago.

“At this time, we are hearing calls for more changes to macro-prudential regulation. The proponents want to make mortgage finance more difficult to obtain. That will result in reduced housing activity and, thereby, slow the growth rate for mortgage indebtedness,” Dunning writes in his report.

He cautions about the importance of the housing sector and warns that some of the economic drivers in the West are no longer present to propel those markets. In Calgary, the benchmark price for a home was down almost four per cent in May from a year ago, while prices in Saskatoon were off 2.3 per cent during the same period.

“Given the importance of housing activity to the national economy (especially since investment in energy projects is no longer a driver of growth), we are hopeful that any changes will be based on a careful consideration of the trade-off between caution in the mortgage market versus overall economic growth,” Dunning writes.

Dunning says it is low mortgage rates — now as low as 2.15 per cent for a five-year fixed rate product, according to ratespy.com — that have caused the resale market to surge.

On the foreign buyer issue, he notes there is gap between average prices produced by the Canadian Real Estate Association statistics and data on price increases from the Teranet/ National Bank House Price Index.

Dunning says a larger gap indicates sale of higher end homes, something he says is present in Toronto and Vancouver, but not in nine other markets.

“This is consistent with increased buying by affluent foreign investors, although it is not conclusive proof,” he writes. “Given the available data, it may be impossible to measure buying by foreign investors with any reasonable accuracy, and it would be even more difficult to measure the consequences.”

As for the bubble talk, the economist says it has been going on since 2008 without any real evidence.

“Those comments have generally assumed that rapid growth in house prices (or a rising ratio of house prices versus incomes or of house prices versus rents) is sufficient evidence of a bubble,” writes Dunning. “To the contrary, these supposedly strong indicators are not definitive proof. They may actually represent healthy outcomes within existing conditions.”

In order to prove a bubble exists, he says there must be “expectations of price growth that are self-fulfilling” and that the expectations lead to increased and excessive activity in the housing market.

He also says prices must diverge significantly from what should be expected based on economic fundamentals. As far as Dunning is concerned, the current market does not meet these conditions.

Given the available data, it may be impossible to measure buying by foreign investors with any reasonable accuracy, and it would be even more difficult to measure the consequence. WILL DUNNING