Canada's Condominium Magazine

Mortgage professionals urge government to proceed with caution in housing market

Canada’s mortgage professionals caution that the federal government should avoid doing damage to the country’s housing market by further tightening mortgage lending conditions. The chief economist for Mortgage Professionals Canada, Will Dunning, dismisses the notion that bubble conditions exist in Canada’s housing markets, which would require government intervention. On the contrary, housing activity is a “primary driver” of the economy, and any steps that would take people out of the market could have adverse effects, he warns.

The calls for “macro-prudential” measures to deal with the overheated housing markets are rising again, says the economist. While he acknowledges that Toronto and Vancouver are hot markets, he argues that the real problem there is insufficiency of supply. “Even if demand has been reduced by the July 2012 changes (to mortgage lending requirements), the volume of activity has been determined not by demand, but by the supply constraint. The real problem in those markets has not been addressed.”

The severity of that lack of supply can be readily seen. For the past decade, Dunning states, Toronto has seen a shortfall of about 10,000 new low-rise dwellings per year, resulting in a deficit of 100,000 low-rise homes at present. Even though this scarcity has driven prices to unprecedented heights, there is still “affordability space” even in Toronto, the economist argues, meaning that prices could potentially rise further, even “by very substantial amounts.” Price growth in Toronto is consistent with the economic fundamentals of interest rates, affordability and job creation.

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Further, price growth, even when rapid as in Toronto, is not in itself evidence of “a speculative mindset.” Other factors, such as a shortage of some types of housing, also drive price growth. There is also evidence of “elevated activity” in the high end of the housing market, in part driven by foreign buyers. This too accelerates price growth.

In discussing affordability, the mortgage professionals’ report looks at it in terms of a mortgage borrower’s ability to repay his or her mortgage. The “effective” or “net” cost is the interest component alone. More than half of the first payment on a mortgage goes to interest, while the principal portion may be considered as a form of forced saving, as it builds equity in the home. The “current” cost of the mortgage includes the total payment of interest and principal.

By these measures, affordability is “relatively attractive” in terms of current cost, and “exceptionally” so in terms of net cost. In Toronto, assuming an interest rate of 2.5 per cent and mortgage amortization period of twenty-five years, the current (i.e. total) mortgage cost is above the average level by 12 per cent, but 22 per cent below average for net cost (i.e. interest component only). Low interest rates have indeed resulted in more indebtedness, but the burden of those debts has not become more onerous, says Dunning.

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Condominiums remain an affordable option for many in hot housing markets like Toronto.

If, however, a “non-trivial” rise in interest rates were to occur, meaning 1 percentage point or more (to 3.5 per cent), mortgage cost indexes would rise above their normal levels, Dunning argues, and housing activity would be “sharply curtailed.” If that were to happen, housing prices might be unsustainable.

To the question, “Does the government need to intervene again?” Dunning answers that we do not have “compelling evidence” that significant numbers of Canadians are taking “unreasonable” risks in the housing market. The mortgage arrears rate, for example, is 0.28 per cent, near its all-time low of 0.24 per cent. Canadians are “highly motivated” to repay their mortgages and most do so in less time than the original amortization period.

Conclusive evidence of undue risk-taking and threat to the system, says Dunning, will only be found when institutions like Canada Mortgage and Housing Corporation and the big lending institutions make available whatever information they have.

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