Housing mania requires tough decisions that the feds can't be trusted to make
Bill Morneau had been finance minister for only 36 days when he first attempted to do something about runaway housing prices and mortgage debt.
He announced in December 2015 that the minimum down payment for an insured mortgage would in two months rise to 10 per cent from five per cent on the portion of the loan that exceeds $500,000.
It was a risky move for Morneau, a first-time member of Parliament from Toronto, since it would irritate constituents who had become wealthier by owning real estate from the beginning of the housing boom. But a response was overdue. Household debt had exploded to record levels and Canada had become vulnerable to a financial crisis.
Given what we now know about the Justin Trudeau government's aversion to haste, the decision seems that much more significant. No advisory committees, just action.
But the announcement also exposed a fatal flaw in Canada's approach to housing policy. Morneau had essentially pulled the new regulation off the shelf.
The deputy finance minister, Bank of Canada, federal banking regulator and Ottawa's other financial agencies had been urging the former government to cool the fires raging in the housing market for months. Then prime minister Stephen Harper refused. It was too close to an election. Any policy that would make it more difficult to borrow to buy a home — or risked depressing prices — was off the table.
History often rhymes, but unlike the rest of Mark Twain's famous quote, it does sometimes repeat. Trudeau's government presents itself as less cynical than its predecessor, but don't believe it. Confronted with an acute outbreak of housing mania this spring, Trudeau and his current finance minister, Chrystia Freeland, turned to the Harper playbook. Trudeau and Freeland could have used last month's budget to finally overhaul a deeply flawed housing policy. Instead, with the possibility of an election this year, they did the minimum.
“Relatively modest steps were taken to cool the nation's frothy housing markets, amid calls for significant action on this front,” Rishi Sondhi, an economist at Toronto-Dominion Bank, said in a report on May 5.
The heaviest of those steps was a one-per-cent tax on the value of vacant properties owned by non-residents, effectively a tariff on foreign speculation that would protect domestic speculators from competition. “We think it will do little to curb current housing market froth which appears to be overwhelmingly domestic-driven,” Sondhi said.
The $1.67 billion that financial institutions lent Canadians in February to buy houses was seven per cent higher than a year earlier, according to the most recent data compiled by Statistics Canada.
Back in the summer of 2015, mortgage credit was growing at an annual rate of about six per cent, compared with five per cent or so a year earlier.
The housing crisis then was really a story about massive bubbles in Vancouver and Toronto. That argued against an aggressive federal response. There's no such thing as a national housing market, goes the cliché. It would be folly, not to mention unfair, to punish buyers in places such as Moncton, N.B., and Ottawa for the sins of the Big Smoke and Lotusland, both of which had emerged as global destinations for international high-flyers in the aftermath of the Great Recession.
The mania has now spread. In March, Canada Mortgage and Housing Corp. flagged Moncton and Ottawa as being highly vulnerable to a collapse, along with Hamilton, Toronto and Halifax.
Victoria, Vancouver, Edmonton, Calgary and Montreal were described as “moderate” risks to financial stability. “There is now evidence of overheating at the national level,” CMHC said in its latest quarterly Housing Market Assessment.
The federal government dislikes risk, no matter who is in power. Its senior leaders think their caution is the reason Canada so often avoids serious trouble. But Freeland must understand that there is a price for inaction. She often cites her experience as a journalist covering the 2008-09 financial crisis as a qualification for the job she now holds. She should know what can happen when low interest rates, narratives that glorify home ownership, and the fear of missing out all combine to turn local frenzies into a national vulnerability.
The Great Recession was triggered by big banks in the United States and Europe that were blinded by greed. But the recession was as terrible as it was because the U.S. economy had become dependent on household borrowing. Demand disappeared when credit lines were cut, and the value of the collateral for all of that lending deflated.
The recovery took years. The cost was reflected in a terrible opioid crisis and the political upheaval that surrounded the rise of Donald Trump, the former Republican president. The world would be very different today if America's leaders had seen the dangers inherent in surging household credit, rather than using the numbers to reinforce notions about the benefits of an “ownership society.”
Does that mean Canada is destined for similar despair? Recent history suggests Canadians are good at balancing on the edge of a precipice. But that's not a reason to keep putting off a major rethink of a housing policy that was made for a time when demand-side incentives were justified by structurally high interest rates.
Those days are gone. All or most of the sops for homebuyers should disappear with them, including the capital-gains deduction on the sale of primary residences. A good tax system rewards risky investments that increase the economy's capacity to grow. Housing is a drag on productivity since it's a magnet for capital that could be better used elsewhere. Canada plows significantly more money into transferring existing homes to new owners than it does on research and development each year.
Regulation also needs to change, if only to break its connection to the election cycle.
The Bank of Canada takes a lot of flak for the affordability crisis, but if it actually had the authority to do something about it, the situation probably would be less dangerous.
The central bank's job is to keep the Consumer Price Index advancing at a rate of about two per cent a year. That task now appears to require extremely low interest rates. The central bank needs the ability to deflate asset-price bubbles that are the side-effects of aggressive monetary policy.
Some might say that's too much power for an unelected body. But remember that the Bank of Canada was handed a long leash to manage inflation because it had become clear that politicians couldn't be trusted to make the hard choices required to cool economic growth.
Canada's real-estate bubble has now been inflating for more than a decade. That's enough evidence to show that politicians can't be trusted to manage housing policy, either.