At long last, the federal government has decided to seriously address the housing price bubble that has increasingly concerned Canadians.
On the heels of multiple warnings from the Bank of Canada that Canadians have taken on too much household debt for comfort (we hold the dubious distinction of having the worst consumer debt to financial assets ratio among 20 OECD nations), the federal government announced three moves. It will reduce the maximum insurable amortization period from 35 years to 30 years as it scales back both home equity loans and the amount homeowners can refinance. With these changes, we are about half way back to where the CMHC lending standards stood in 2006 when the Harper government significantly loosened them.
With these moves, the federal government is starting to take seriously the risk of record-high housing prices and record-high household debt. The banks who provide the mortgages have been looking for action in this area for some time, even though they were unwilling to do it on their own -- even, astonishingly, after loose mortgage rules in the U.S. helped feed into a global economic meltdown.
Ultimately, these federal changes will have the greatest effect on middle-class Canadians -- those whose largest asset is their house and whose largest debt is their mortgage (and sometime second mortgage) on that same house. This could go one of two possible ways.
The pessimistic possibility is that trying to reign in mortgage debt and housing prices could burst the housing bubble that simultaneously exists in six Canadian cities.
Developers, spooked by falling house prices, could slow down new housing starts.
Homeowners, who see their home equity loans cut and their house values decline, could scrap renovation plans or forego buying that big-screen TV. Since consumer confidence -- you and I opening up our wallet and buying things for our households -- has been an important player in Canada's economic recovery, a tightening of household belts could have a short-term impact on our economy and on our sense of security.
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The optimistic possibility is that reverting to pre-2006 regulations could help put a lid on house prices, which have risen too much and too fast since 2001. It could also force Canadians, who used to be a nation of savers, to get back to basics and start saving again.
Perhaps it will lead to the great rethink the worldwide economic meltdown was supposed to inspire. Imagine a world in which you could own a home without being "house poor" or, worse, a couple of paycheques away from financial disaster.
Whatever the outcome, there still remains a need for a more coordinated strategy to deal with high housing prices and tighter lending realities. Once you get yourself into this precarious a position, every step you take, no matter how well intentioned, may lead to disaster.
Even with the latest federal government announcements, Canada's housing bubble remains a problem.
Between 1980 and 2001, housing prices in four of the six major markets in Canada (Edmonton, Calgary, Ottawa and Montreal) remained in a tight band of between $150,000 and $220,000 (in today's dollars). Through two major recessions, big interest rate hikes, stock market crashes and so on, house prices just puttered along, going up at about the rate of inflation.
It seems almost unimaginable today and really downright boring. In these four cities, there were no heady 10 per cent increases a year, no bidding wars, just a stodgy two per cent a year, how dull.
Except for Toronto and Vancouver, which experienced three housing price declines between them brought on by interest rate hikes. When the bubbles burst, they wiped out in the worst case more than 35 per cent of an average house's value -- a painful brush with reality.
Today it isn't just Toronto and Vancouver, it's all six major Canadian cities that are outside of the safety zone. House prices are no longer dull. Unfortunately, the tradeoff is endless middle-class worry that the party for their biggest asset isn't going to last.
To avoid disaster, the federal government needs to continue slowly moving back to the 2006 standard of a maximum 25-year amortization for CMHC mortgage insurance with more money down.
If these moves impact Canada's fragile economic recovery, the federal government may have to consider additional stimulus investments to keep the recovery on track (building more affordable housing could perform double duty in this case).
Canada's housing market is still on a knife's edge and isn't clear which way we'll fall. This story is far from over. That's why this week's federal government announcement is a welcome change of heart. But it's one of several changes that needs to unfold.
David Macdonald is coordinator of the Canadian Centre for Policy Alternatives' annual Alternative Federal Budget and author of Canada's Housing Bubble: An Accident Waiting to Happen.
Well I understand that we need to increase savings and discourage borrowing this type of policy will only further gentrification by maintaining the elites stranglehold on property. What we need to do is make it easier for lower/middle income families to purchase property so that they can build equity rather than be a slave to landlords. Ban refinancing, put limits on credit card debt, ban payday loans and other nefarious lending practices. Lower school debt. These are things that would help. But making it harder for people to build equity is only going to further the rich's centralization of money. Because they can afford those mortgages. I can't. Or interject non-market based housing which affordable for low/middle income people to purchase so that they can get out from under the thumb of landlord dictators.
EcoCollectivist, are you for real?
EC: "make it easier for lower/middle income families to pucrchase property so that they can build equity"
Me: George W. Bush advocated for the same thing. Mortgage rules were loosened. Guarantees were put in place by government. Everyone was approved for a mortgage -- all in the name of "affordability". "Good jobs" in construction were everywhere! Property tax collections went up! But in the end, how did that work out for the United States?
Canada went down the same road. 0% down, 40 year variable rate prime minus 1 mortgages were here two short years ago. When finally interest rates rise, will these accomodations benefit or punish lower/middle income families?
EC: "rather than be a slave to landlords"
Me: Pick your poison. Would you rather be a slave to your landlord or a slave to your mortgage/bank?
EC: "making it harder for people to build equity is only going to further the rich's centralization of money"
Me: Putting aside that the rich, by definition, have more money centralized upon themselves (that's what make 'em rich!) there's another way to make housing more affordable for everyone: let the prices fall naturally.
Stop guaranteeing profits to the banks with gov't money (through CMHC and other gov't lending guarantees). Stop approving everyone who walks through the door. Stop these crazy CMHC subsidies and programs.
Prices will fall.
When they do, prudent lower income families will once again be able to deservedly purchase their home at a reasonable price they can afford. Ta. Da.
EC: "interject (sic) non-market based housing which affordable (sic) for low/middle income people to purchase"
Me: I know what you're getting at, but the road to hell is paved with good intentions, EC. When these low/middle income people become middle/high income people, they'll no longer qualify for that non-market based housing. Will they want their income to increase (ie, allow it to increase) if their effective tax rate ends up being more than 100%? I don't think so. That keeps them stuck in the cycle of poverty, because taking a good job will actually cost them more than they will make. Probably not what we want to happen, now is it?
Remarkably, I think EC and I agree on where we need to go. We only disagree on how to get there.
George W. Bush advocated for bank elites to swindle the poor, incompetent and hyper-consuming masses. I am in no way advocating this. In fact I wouldn't even allow the private banks to touch the mortgages I am talking about. The problem with your theories is that they are based in the dead dogma of classic neo-liberal laissez-faire economics. Our economy is a complete social construction which does not have any a priori legitimacy. We can formulate it how we want. Markets do have certain economic realities to which they adhere but not everything must succumb to markets. Markets should not dominate our economic reality, they should only be a part of it.
Firstly, I do not want housing prices to fall as that destroys wealth which becomes a downward spiral. The problem in the US was that a $400,000 mortgage was on a $200,000 house. This would not help anyone, even the lower income earners, because their wealth would fall with everyone else’s.
Moreover, giving "sub-prime" mortgages to people who are consuming faster than is economically, or environmentally, possible is not what i am talking about. If you re-read my post I am advocate for the banning of re-financing (an issue in the sub-prime mortgage debacle), limits on credit card debt based on income, limits on credit card interest rates, banning "payday" loans and all other loan sharking activities which perpetuate stupid economic decisions.
Houses should be built which are affordable to lower income families and they should be interspersed in economically diverse communities; i.e. not coral all the poor into their own little area. These places would be financed through a government bank (not Bush style private profit interest) at interest rates around 2% over prime. Purchasers would have to clearly show that they can afford this mortgage. If they cannot prove this they would be put on a program to get their debt in order so that they could afford the mortgage. The price of these houses would be outside of the market and be index to inflation. Thus a low income earner could build equity in a home and, if they so choose, use that equity to one day buy a market priced home. Since these homes would be indexed to inflation they would not loose their investment, but it would always be in range of low income earners. This allows markets to keep working but does not make the market the GOD OF ALL.
Now you probably will call me a dreamer. "This is INSANE" you will say. Yet for society to progress we must dream. I am in no way saying I have all the answers, or even that this IS the answer; but your economics is old, tiresome and perpetuates the slavery to the landlord. We have flown to the moon, cracked the human genome, broken the sound barrier, split the atom and yet we still rely on 18/19th century economics. Why? Because it keeps people in power and centralizes their wealth. Simply put, the corporate aristocracy is why our economics have not changed. It wouldn't be to their benefit.
Such policies as I described would teach good money management, would inhibit hyper-consumption, which is detrimental to the planet, and would create a more equitable, safe and crime free society. Jails do not deter crime. Giving someone a stake in their community and life, does deter crime.
Or we could continue what we are doing. Seems to be working so far :P.
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