September 15th 2013


Are tighter mortgage rules needed?

While Canadian housing prices are high, so too are key drivers of demand.


It’s no secret that Canadian residential real estate prices, which have more than doubled during the past decade, have been an ongoing source of concern for housing sector stakeholders.

Former Bank of Canada governor Mark Carney for example made consistent efforts to talk down the market in the months before he left his post in June.


In addition, last year Finance Minister Jim Flaherty trimmed the maximum amortization period for a government-insured mortgage from 30 years to 25, his fourth tightening effort. As if that was not enough, recently reports have emerged that regulators at the Office of the Superintendant of Financial Institutions, have been looking at ways of their own to cool the market.


However according to one expert such efforts would be premature. “We do not believe that additional measures are needed to calm the residential real estate sector right now,” says Matthieu Arseneau, a senior economist at National Bank Financial. “House prices are already growing quite moderately, and the effects of rising interest rates have not fully been felt.” 


As Arseneau notes in a recent special report, Canada’s residential real estate market has been benefitting from strong household formation. This sets it apart from many other economies such as Europe and Japan.


“Canada is currently riding a substantial population growth curve as a result of highly favourable migration strongly skewed to the 20-44 age group which is most likely to from households,” he says. “This cohort of the population grew at the fastest pace in more than 20 years, substantially higher than other developed countries.”


A key driver in the tightening debate has been the influential Economist Magazine, which tracks sector trends in a variety of countries and which recently characterized Canada’s house prices as “bubbly.” The publication bases this assessment on data published in its August 31rst issue, which suggest that residential real estate here is overvalued relative to both rents (74%) and incomes (30%).


Arseneau disagrees that this is a major problem. “Though growth in the 20-44 age group is set to decelerate over the next five years, it is likely to remain positive and well above the trend line of other advanced economies,” he notes. “We expect that this phenomenon will cushion the effect of rising mortgage rates.”


Assessing who is right isn’t easy. Much depends on whether those rising numbers of Canadian who are entering the household formation age range will have the jobs and paycheques they will need to service mortgage debt and other home-ownership costs. Last week’s Labour Force Survey results provide some good news on that front. The Canadian economy created 59,000 net new jobs in August according to Statistics Canada, bringing the country’s jobless rate down to just 7.1 percent.


Whether that trend will continue in coming months should provide household sector stakeholders with a good clue as to how much further mortgage rule tightening, if any, will be needed.







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