Hey there, time traveller!
This article was published 17/6/2014 (713 days ago), so information in it may no longer be current.
House prices in Canada shot up again in May, real estate brokers reported this week. The burst of house-buying, reflecting low interest rates promoted by Finance Minister Joe Oliver and the Bank of Canada, suggests the government should ease itself out of the business of guaranteeing mortgages for middle-income and upper-income households.
The Canadian Real Estate Association, representing real estate brokers, estimated the national average price of homes sold in May was $416,584, up 7.1 per cent from the same month last year. Leaving out the hot markets of Toronto and Vancouver, the average house price for the rest of the country was $336,373 and the year-over-year increase was 5.3 per cent. May saw a burst of house-buying that increased the number of home sales by 5.9 per cent from April's total. This was the largest month-to-month increase in four years.
The late Jim Flaherty, when he was finance minister, worried about rapid growth of the mortgage debt of Canadian households. He sought to reduce the risk to the federal treasury from homeowners' defaults. For that purpose, for example, he shortened to 25 years from 30 the maximum length of a mortgage insured by the Canada Mortgage and Housing Corporation and in other ways narrowed CMHC's support for mortgage lending. In March 2013, he ordered banks not to follow Bank of Montreal in posting a 2.99 per cent interest rate on five-year fixed rate mortgages.
Mark Carney, when he was governor of the Bank of Canada, worried about the effect a rise in interest rates would have on families that had borrowed to the limit of their income to buy a house. Stephen Poloz, however, who took Mr. Carney's place at the Bank of Canada last summer, said on June 12 he was seeing signs Canada's housing market was headed for a soft landing -- which would be a gradual return to sustainable levels of household mortgage debt.
The burst of house-buying in May, however, did not look much like an approach to a soft landing. It looked more like another puff of air into a housing market bubble.
Economists of the Organization for Economic Co-operation and Development have also been drawing attention to the way Canada's low interest rates have driven up house prices and household debt. They proposed in their June 11 Economic Survey of Canada that CMHC should cover only part of a bank's loss in the case of a mortgage default. They also wanted a lower cap on the total volume of CMHC mortgages. Better support for multi-dwelling units might improve affordability for low-income households.
Because of low interest rates, Canada has enjoyed modest economic expansion despite the Harper government's restraint of government spending. But the interest rate is an extremely blunt instrument: While cheap and abundant credit has perhaps spared Canada from a recession, it has also inflated house prices and induced a steady increase in household debt.
The government cannot readily maintain one monetary policy for industry, so as to boost employment, and a second monetary policy for home-buyers, so as to support the housing market. It can, however, continue to narrow the role of CMHC in guaranteeing mortgages. It can require larger down-payments from home-buyers. It can require banks to assume more of the default risk in each mortgage they write. It should in the meantime steer resources toward the low-income end of the housing market to improve the supply of affordable housing.
The middle- and upper-income households who just drove the average price of a Canadian house up to $416,584 evidently do not need as much support as they now receive from the government through CMHC. A time may come when the whole housing market will need government mortgage guarantees, but in the current context, government support should be concentrated on the families who cannot readily afford a place to live.