Canada's Condominium Magazine
A new look at the residential mortgage market in Canada places the blame for troubles in the housing market today squarely on the shoulders of the federal government. Mortgage lending in pre-recession days was “clearly too lax” and needed tightening, says Will Dunning, in “Looking for a New Normal in the Residential Mortgage Market.” The government’s three interventions in the mortgage market between 2008 and 2011 produced “a reasonable state of balance” in most communities, and further tightening, he says, was not warranted.
But the government, concerned about what was happening in cities like Vancouver and Toronto, intervened again in 2012 with a fourth set of mortgage insurance criteria intended to dampen demand. This caused a “sharp further reduction” in housing activity across the country, from which the market has not recovered, but did not address the real issue: inadequate supply in certain key markets, notably Toronto. Today, housing activity remains high in the major markets but low elsewhere. By next year, the report states, housing starts will have fallen by 20 per cent compared to 2011-2012 levels.
This report argues that the changes made in 2012 were inappropriate: there was an issue of inadequate housing supply in a few communities that was resulting in excessive price growth in those communities. But, the policy response to these localized supply issues was to depress housing demand, which applies (unnecessarily) to all areas of Canada, and creates unnecessary negative pressures on the Canadian economy. Appropriate policy reaction would have focused on the supply issues in those few communities.
CAAMP: Looking for a New Normal in the Residential Mortgage Market
Consumers are happy with their mortgages
The report, written for the Canadian Association of Accredited Mortgage Professionals (CAAMP), also looks at consumer attitudes toward the housing market in general and their own circumstances in particular. From that consumer perspective, “we have a picture of a very confident, healthy mortgage market,” according to the president of CAAMP, Jim Murphy. Among the positive findings:
- First-time buyers accounted for 55 per cent of homes purchased in 2013; the estimated number of homes bought was 625,000–650,000
- Most of the 5.60 million Canadians who have mortgages have no regrets about the size of their mortgage and believe that real estate is a good long term investment
- The majority, 66 per cent, agree in some degree that mortgages are a form of “good debt”
- More than 80 per cent of homeowners in Canada have 25 per cent or more equity in their homes; the average Canadian with a mortgage has 51 per cent equity
- The average mortgage interest rate is 3.24 per cent, a drop from the average of 3.5 per cent found in the fall 2013 survey
- The average Canadian now pays off the mortgage in two-thirds of the contracted amortization period; thanks to the continued low interest rates, mortgage holders are able to pay down their mortgages faster, with lump-sum payments and extra monthly payments
In contrast to this sunny picture of contented consumers and buoyant conditions in Toronto and Vancouver, the report’s author argues that the housing market in the rest of the country is slowing, and has been since 2012. The danger is that decreased housing starts and slower price growth will “throw off the balance” between the housing market and the overall economy. If the slowdown in job creation continues, a consequence of slowing new housing market activity, then demand for housing will also slow further, and a vicious downward cycle could develop.