Overheated Housing Markets – More Finger Pointing?

By Peter Kinch

The overheated housing markets in Toronto and Vancouver are once again stealing headlines this week – it’s like the story that keeps on giving. This time, though, there are different players entering the fray who have everyone talking: Canada’s chartered banks.

In a 72 hour period this week, we’ve heard from RBC, Scotiabank, BMO, CIBC and National Bank. From CEOs to chief economists, everyone has an opinion about what should be done to curb what is seen as a growing concern.

The issue: Overheated housing markets in Toronto and Vancouver.

The solution: Well, that’s where it gets interesting, and where everyone has an opinion. Many of those opinions seem to be pointing fingers at Ottawa to do something about it.

I find it interesting that, during a period of time where our chartered banks are reeling from large losses due to loan write downs in the energy sector (National Bank Earnings down 48%), they seem to be using the housing market as a way to deflect attention back to Ottawa, but the suggestions they are making simply don’t make sense.

Both Scotiabank and National Bank have suggested that Ottawa should consider increasing the minimum down payment to 10%. So let’s think about this for a moment. Let’s agree that the Organization for Economic Co-operation and Development (OCED) is correct in the assertion that Vancouver and Toronto represent over-heated housing markets. I’m certain that if you took a poll asking Vancouverites the single biggest cause behind the exorbitant price increases, I guarantee you that first-time home buyers would not be on the list. Yet, a simple analytics of increasing the minimum down payment from 5% to 10% will show you that the only group impacted would be the first-time home buyer purchasing a property under $500,000.

Let’s look at a few simple facts:

• Any changes Ottawa makes to mortgages can only impact CMHC
• CMHC only governs high ratio mortgages (any purchase with less than 20% down payment)
• To qualify for CMHC insurance you have to be buying your home as a residence – not a rental or spec property to flip
• CMHC will no longer provide insurance for mortgages worth over $1 million (that alone rules out a huge percentage of Vancouver homes)
• For mortgages between $500,000 and $999,000, the rules have already changed regarding the minimum down payment, and you now have to put an additional 5% down on the portion of your mortgage over $500,000 – so you could argue that covers any mortgages in excess of $500,000
• That leaves us with mortgages that are less than $500,000. Both Scotiabank’s Brian Porter and National Bank’s Louis Vachon are calling for Ottawa to raise the minimum down payment on all properties to 10% as a way to combat the overheated housing problem.

Memo to Ottawa: that’s not the issue here!

It doesn’t take a forensic scientist to figure out that the majority of home buyers in Vancouver and Toronto buying below $500,000 are first time home buyers and entry-level home owners. Penalizing first time home buyers is not going to remedy the fact that the average house price in Vancouver is now over a million dollars. In fact, it will only exacerbate the problem for those who are already impacted by the rising cost of entry-level housing.

The problem with trying to find the problem often assumes there is a singular answer. The truth is the rising cost of housing in Vancouver in particular is a multi-faceted issue, and one that does not have a singular solution. In fact, any talk about whether the bubble will burst in the Vancouver housing market presupposes that there is a bubble to begin with. It has been a well-documented debate that Vancouver is in the midst of becoming a major metropolitan centre. It has become a world-class destination that is confined by a border, mountains, the ocean and the ALR (Agricultural Land Reserve). To a certain extent, the simple laws of supply and demand play a role in the ever-increasing cost of land. Simply put, as long as the demand continues to grow and the supply of land and housing continues to be limited, prices will continue to rise.

Trying to put restrictions on the ability for first time home buyers to enter the market will have a negligible effect on the supply and demand equation. The elephant in the room is the offshore buying – in particular the Chinese. Combine foreign ownership with a low Canadian dollar that makes Vancouver real estate affordable to American buyers, and you have a recipe for increased demand. And this doesn’t even factor into account the foreign money that is expected to come from the Middle East. Let’s face it, global money seeks safe harbours, and Vancouver and Toronto are considered safe harbours. As long as that foreign money is looking for a home and parking it in places like Vancouver continues to be an easy process, the demand side of the equation will continue to be over-weighted.

It seems obvious to me that if Ottawa truly wanted to do something about the over-heated housing prices, their energy would be far better spent looking at ways to slow down the foreign buying in our cities, rather than shifting their sights to the Canadian first time home buyer.

Sorry Brian, sorry Louis – they’re not your problem.{{cta(‘5510749d-c854-4e57-a2b1-ca60ac46ede8′,’justifycenter’)}}