June 21, 2012
Title: Housing sector warnings abound
Sub-title: Recent changes to mortgage rules provide ammunition to those who think that Canada’s housing sector could face tough times.
Finance Minister Jim Flaherty’s announcement last week that the government would be tightening mortgage lending rules, capped a series of bleak warnings about Canada’s residential housing sector issued recently by a variety of experts.
Under the new rules, the maximum mortgage amortization period has been cut from 30 years down to 25, and the maximum amount that Canadians can withdraw to refinance their mortgages has been reduced to 80 percent of the home’s market value, from 85 percent. The tighter regulations are Flaherty’s third attempt at calming a housing sector which has threatened to reach bubble status in some part of the country, and at cooling Canadian household debt levels, which remain high despite an uncertain global economic environment.
Mark Carney, governor of the Bank of Canada, has been particularly vocal in this regard, despite the fact that much of Canadians’ borrowing (which has been rising faster than personnel income) has been fed by the central bank’s own loose monetary policy. With its key interest rate at 1 percent and Canadians thus able to take out loans at just a few points above that, it should come as not surprise that they would load up on debt to buy new or bigger houses, cars and appliances.
Much depends on Toronto and Vancouver
That said, the central bank has its hands tied. It cannot raise interest rates in today’s sluggish economy otherwise it risks pushing the country into a slowdown, and possibly even a recession. As a result, Carney is thought to have lobbied hard behind the scenes for tougher lending standards. That said, the Bank of Canada has been vocal in public too, warning in its recent Financial System Review, that the residential real estate market was poised for a slowdown.
“The continued high level of activity and stretched valuations in some segments of the housing market are of increasing concern,” warned the report, which cited the trends as the key risks to Canada’s economy going forward. How the Canadian residential real estate sector does during coming years will depend in large part on what happens in the Toronto and Vancouver markets, two of the main drivers of the sector’s recent strength.
Those two markets have diverged in recent years notes Derek Burleton, an economist with TD Securities in a recent note to the bank’s clients. However he expects both markets to eventually head in the same direction – down. “Longer term both markets are likely 15 percent over valued,” said Burleton. “Inventory levels that are already high (in Vancouver), or set to head higher (in Toronto), make the condo market the bigger concern in both cities.”
What effect will the mortgage changes have?
Flaherty’s mortgage regulation changes come at a time when Canadian housing sector statistics, although strong, are starting to already show some signs of weakness. For example accoutring to the Canadian Real Estate Association, sales of existing homes slipped during May by 3.1 percent compared to the previous month. The average selling price of those homes too fell, by 0.3 percent compared to the corresponding period last year, to $375,605.
Housing starts also slipped to 211,400 units during May, compared to 243,000 in April. That said, those numbers are exceptionally strong both on a per capita basis and relative to levels in other countries, notes the Canada Mortgage Housing Corporation, which had revised downwards its sector growth projections related to both new and existing homes, even before Flaherty’s recent announcement.
What effect Flaherty’s changes will have remains an open question, due in part to some fuzziness in how rules related to the capping of gross debt service ratios will be interpreted, notes one industry expert, who nevertheless lauds the proposals’ overall thrust. “We see (the) announcement as a much better substitute to interest rate hikes since the moves are aimed with almost surgical precision at the margin of the mortgage market,” notes Benjamin Tal, an economist at CIBC World Markets. “The combined impact of the changes will not be large enough to derail the housing market, but (is) clearly significant enough to soften activity.”
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