This article came from The Financial Post; I’ll comment on it throughout, in italics.
Think of Canada’s housing market as a ticking time bomb. Think of Finance Minister Jim Flaherty as the unlucky bomb disposal expert called in to deal with the problem.
Flaherty is moving slowly — oh, so slowly — to snip a wire here and there in an attempt to defuse the mess. Problem is, the ticking is getting louder by the minute.
This commentary seems somewhat melodramatic to me, from the perspective of someone working in the trenches of the real estate business.
If the bomb explodes, home prices could plunge. In the worst case, plunging prices could bring on an economic downfall such as the United States, Ireland and Spain suffered after their real estate markets collapsed.
All these people who insist on comparing the Canadian housing market to the US housing market are so misguided – they could not be more different whilst retaining some similarity.
But to make Flaherty’s challenge even more difficult, he still has to convince most people the bomb even exists. At the moment, he’s being cautious in how he describes the problem. He’s being even more cautious in how he deals with it. Perhaps too cautious.
The mere fact that he’s talking about it, and the mainstream media is giving it so much play, would seem to be enough.
Flaherty told Canwest News Service last week that he’s monitoring the real estate market and is ready to intervene if it reaches “irrational” levels. The Finance Minister says he may require homebuyers to put down higher down payments. He may also force them to amortize their mortgages over shorter periods.
No doubt these are excellent ideas. But Flaherty has already tried them.
Seems to me that I keep on reading words to the effect of ‘Where the housing market goes, so goes the national economy’. Who’s going to define ‘irrational levels’? Surely not a bunch of politicians who are watching the national debt grow while raking in untold tens of millions of dollars in lottery revenue each week? Sure, let’s make it harder for people to buy a house, yeah, makes sense to me. NOT!
In July 2008, he made his first tentative move to defuse the housing sector by requiring homebuyers to put down at least 5% of the purchase price of a home.
Actually, he didn’t do that at all. 100% Financing is alive and well and able to be done a number of legitimate ways – need to get 100% finance? Call me for details!
At the same time, Flaherty reduced the maximum amortization period on home mortgages to 35 years from the previous limit of 40 years.
BIG DEAL! Window dressing and nothing more!! Ask your local mortgage broker how many people took a 40-year amortization and you’ll find that few did and the ones who did were the ones the program was aimed at helping – young professionals graduating from school with massive debts and investors looking to turn an iffy ROI into positive cash flow.
His cautious strategy accomplished absolutely nothing. The Canadian Real Estate Association reported the resale price of an average Canadian home hit $337,231 in November, up a stunning 19% from a year earlier.
If a red-hot real estate market during the brutal recession of the past year doesn’t meet Flaherty’s definition of an “irrational” market, it’s difficult to know what would.
Might you want to stop and ask WHY the market has seen prices rise the way it has? Even the most uninformed of Realtors knows why – it’s the beauty of the laws of supply & demand at work. In case the reporter doesn’t know, the less of something there is available, the more it will cost. So the question becomes ‘Why are there less houses available?’ Ummm, perhaps because people are worried about their jobs? And so we have a government who supposedly knows that we are in a Recession and they’re trying to kill off one of the sectors that is doing well? Yeah, makes sense to me!
Yes, interest rates are historically low, but any rational homebuyer has to realize interest rates will inevitably rise. When that happens, many homeowners will face much larger mortgage payments.
Canadians appear unshaken by the risk of higher rates, perhaps because home prices have doubled over the past decade and many buyers assume more gains lie ahead.
If Mr. Flaherty wants some real information, he needs to talk with real estate agents who deal with consumers every day. Then, and probably only then, will he hear that Buyers are NOT going out and spending anywhere near to the max of what they could spend. He’d hear of the many conversations between Buyers and their agents, where the Buyers are figuring what their carrying costs would be in rates jumped by a couple of percent. But hey, that wouldn’t happen for 5 years anyway, right? Surely Mr. Flaherty doesn’t know what the economy will be like in 5 years?
It is difficult, though, to come up with a rational explanation of why home prices should climb from here.
Oh, really? If you look at average house prices across Canada, as a national average, you will see that the average price increase comes out to around 4% per year over the last 50 years. Sure, some years it goes up and some years it goes down, but the trend-line is 4% annual increase. Why is that bad?
Canada’s population growth has been nothing extraordinary. Wage increases have crawled. The supply of new homes has surged and the level of home ownership stands at a four-decade high. Meanwhile, Canadians are aging, which suggests the pace of household formation should be slowing down.
So why are homes still being bid higher? It seems to come down to the widespread conviction that a house is a great investment.
Oh really? Not what we real estate agents hear; we hear that buyers don’t want to enrich someone else, that they’ve got to live somewhere, not why not build their equity instead of someone else’s. Surely Mr. Flaherty is not naive enough to think that people buy a house expecting it to double in value every 3, 5, 8 years?
History suggests this is true only sporadically. Robert Shiller, the Yale economist who warned of both the dot-com bubble and the U.S. housing bubble, has accumulated a mountain of data to demonstrate that the price of a home in the United States over the past century has barely beaten the rate of inflation.
Piet Eichholtz, a professor of real estate finance at Maastricht University in the Netherlands, came to a similar conclusion when he studied real estate prices in an Amsterdam neighbourhood from 1628 to 1973. He found that home prices required 350 years to double in real terms.
If you assume home prices should rise in line with inflation, you come to a dire outlook for Canadian real estate. Taking figures from 1990, 1995 and 2000, and boosting them by inflation during the intervening years, suggests the national average home price should check in around $200,000 — a third less than the current figure.
More sophisticated calculations arrive at similar estimates. David Rosenberg, chief economist at the money manager Gluskin Sheff in Toronto, examined home prices in relation to personal incomes and residential rents. He concluded that prices are between 15% and 35% above levels that are consistent with fundamentals.
“If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing,” he writes.
Yeah, yeah, yeah. You lot are missing out on one important factor here – the humanoid emotional
factor. What on earth does a Dutch study have to do with the Canadian housing market? Why on earth would you assume house prices should only rise in line with inflation?
So what can Flaherty do? He’s already missed the opportunity to defuse the real estate bomb at an early stage. He’s understandably reluctant to raise interest rates when the recovery is still tentative.
He should follow through on his vows to increase down payment requirements and shorten amortization periods. Most important, though, he should loudly caution Canadians on the dangers of taking on more mortgage debt when home prices seem unsustainably high. After all, when a bomb disposal expert can’t do anything else, he can at least warn people to run for cover.
Flaherty should let the markets do what the markets do! The Canadian lending industry is regulated well, and is sufficiently good at protecting itself, by having made it much more difficult to get a mortgage that we don’t need any more government intervention!
You government people want to do something, like maybe what you’re supposed to be doing, why don’t you worry about putting people TO work instead of trying to put them out of work!!!
Of course, this is just my opinion.
