If you’re an avid reader of the BuzzBuzzHome Blog, you might notice that we’ve been posting a lot of Buzzonomics columns lately. It’s no coincidence — there has been tons of stuff going on in the housing market over the past few weeks. Here’s the latest:
Yesterday the Bank of Canada announced that it would leave its target for the overnight rate at 1 per cent, despite worries that households are amassing too much debt.
Mark Carney has his hands tied. His job is to ensure that inflation stays within the target range of 1 – 3 per cent. Carney is not responsible for staving off asset bubbles (including the potential looming housing bubble).
Carney’s statement came after a somewhat startling progression in fixed mortgage rates. Big banks are engaged in a price war on mortgage products which began when BMO introduced a five-year fixed rate of 2.99 per cent last week. The whole thing just reeks of housing bubble, but the banks are going to do whatever is most profitable for them and Carney is focused on other elements of the economy. Who’s left to look out for the housing market then? It’s really up to the Feds.
They’re on it though! Well, sort of. Jim Flaherty, Minister of Finance and Harper’s right-hand man, jumped at the opportunity to make a statement about what, if anything, the government is going to do.
“We have been cautioning Canadians for some time that they need to be prepared to have higher interest rates in the future and be aware of the affordability issue that may create for some Canadians, not to assume that mortgage rates will remain low for a long period of time… So we all have to be cautious in our financial planning”. [Globe and Mail]
He’s not necessarily promising action — yet. Flaherty also indicated in his statement that the housing market is beginning to soften already, so hopefully the market will take care of itself. But he is acknowledging the fact that the housing market is on the government’s radar. When Flaherty made a similar statement last year, as the media was in a tizzy about the potential housing bubble, he introduced new rules which included reducing the amortization period of mortgage products from 35 years to 30 years.
Big banks seem to be on board with another adjustment to lending practices. According to the Globe and Mail, TD Bank chief executive officer, Ed Clark said “If you thought the Canadian economy was strong enough to take another adjustment, then we would say take the 30 [year amortization limit] down to 25 and get this back to where it originally was.”
It’s always worrying when the people who stand to profit in the short-term are on board with regulation — usually it’s the government that recognizes regulations will help the long-term economic viability of the country. It happened in the US just before the crisis took hold. Flaherty needs to take their advice sooner rather than later. My advice?
- Increase the down payment required for foreign investors.
- Track the number of foreign investors purchasing units (especially in the pre-construction industry).
- Reduce the maximum amortization period to 25 years.
Just my two cents (for what it’s worth).