Ottawa tightens mortgage rules to make it tougher to buy a home

[bush_cheney2004]

....In fact, there have been threads on MLW discussing this with actual links to real substantive statistics showing how Vancouver, Toronto, and other Canadian markets have surpassed the statistics in many former bubble markets in the US when it comes to debt ratios, price to rent ratios, and price to income ratios.

Just because you choose to ignore these threads does not mean that "no one" is not calling a bubble.

True, but Canadian "bubbles" apparently aren't as interesting as U.S. bubbles, even in a "Canadian forum".

[dre]

There are many ways to do quantitative easing without touching the prime interest rate....

Thats true, but lending money into the economy is easy and fast and the government has a large apparatus (the central bank) all set up to do it. Its also nice and general in that easy credit in the short term will benefit a diverse group of people and industries and regions.

Infrastructure is good as well but its slower. If we decided to spend 50 billion dollars on infrastructure right now it would be years before most of the money was spent into the economy.

In theory the government could make an end run around the banking system completely. It could make the new money at the mint instead of through the banks, and spend it into the economy by paying its employees with it or building a bridge or a road. The government would not go into "debt" if it did this, unlike when it injects money into the system using the fractional reserve system. Lincoln did this to win the civil war with the greenback. The government did not have to go into debt to the banking system to make them and it didnt have to pay interest.

The problem is the government doesnt have a system to get that money to the right people. If it does it through the banking system the banks assess the credit worthiness of both borrowers and projects which reduces malinvestment and gets the money to people that will actually do usefull things with it. It could turn into a real nightmare if the government tried to distribute 100 billion dollars on its own.

Still... I have argued we should look at that. In the IT age tracking credit worthiness and balance of trade is a lot easier.

Edited June 22, 2012 by dre

[Fletch 27]

Little danger in a housing bubble? Why do you think these measures were put in place? Say you grabbed that mortgage at 2.1 percent interest and in 10 years, interest hit 6 percent... Like it was in 2004... Would you sell? This is a cautious approach to mellowing a "possible" bubble. Instead of a crash (with thousands or hundreds of thousands dumping homes), it would be a small population who over extended.

The only people who object to this measure are the people who ARE over-extended and love seeing their 600K purchased house sit close to 900K... Those folks better watch out..

Good for the Tories in watching out for MY ass and not the "Mulcairs" (11 mortgages) of this world...

Talk about closing the barn door after the horse has left.

There is little danger of a housing bubble now in Canada, just after the collapse of such a bubble in the US. Everybody is focussed on the dangers of rising prices and no one is making typical bubble-type arguments as were common in the US before 2008.

Why?

We are very slowly leaving a recession. It would be madness to raise interest rates now. I see no problem with long amortization periods. The lender and borrower should negotiate this in their own best interests.

Bernanke has recently signaled that he would consider further quantitative easing. Our own Carney has decided to leave the key lending rate at its low level.

-----

While I disagree with Krugman's partisan politics, I have to agree with his macro-economic policy prescription. Western economies have a bad infection and rather than give them penicillin, too many people (like you dre) are advocating blood-letting or sleeping with a window open. In the 1930s, people argued for "sound money". Nowadays, they argue for "austerity". In either case, such policies will make things worse.

With that said, too many people also believe that giving penicillin to a healthy person will make it even stronger. Quantitative easing like antibiotics is a remedy; it's not a magical elixir.

We are barely leaving a recession; it is normal for debt levels to be high.

[cybercoma]

I think it is a great idea. I mean I thought I was stupid when they over heated the market by bringing in the 30 year mortgage in the first place. It is good to know that sometimes even if it takes them a million years they can learn from their own mistakes. It is good they have admitted they were wrong when everyone on the left told them they were wrong 5 years ago and have corrected their own error.

I'm glad someone else said it. This is a great idea. It's too bad that the Conservative cheerleaders completely ignore the fact that the CPC is simply rolling back the de-regulation it implemented earlier. Hmmm... regulating the economy. Bloody socialists!

[msj]

True, but Canadian "bubbles" apparently aren't as interesting as U.S. bubbles, even in a "Canadian forum".

But these forums are hosted on US servers, and, for some retarded reason known only to you and American Woman, this is somehow relevant to the discussion....

[msj]

Little danger in a housing bubble? Why do you think these measures were put in place?

The only people who object to this measure are the people who ARE over-extended and love seeing their 600K purchased house sit close to 900K... Those folks better watch out..

Good for the Tories in watching out for MY ass and not the "Mulcairs" (11 mortgages) of this world...

The CPC should have been watching out back in 2006 before they stupidly allowed 0% down and 40 year amortizations which has run up our debt/housing bubble in the first place.

There was no reason to change the rules and just because they have reversed their stupidity is no reason to give credit to them for realizing their error/stupidity 6 years after the fact.

Stupid is as stupid does or some such BS Forest Gump quote....

[msj]

Thats true, but lending money into the economy is easy and fast and the government has a large apparatus (the central bank) all set up to do it. Its also nice and general in that easy credit in the short term will benefit a diverse group of people and industries and regions.

Sure, but lending money for home reno's and giant Dodge Ram's in the driveway isn't exactly a productivity booster in the long run.

Buying and selling of RE is not much different than if we all bought and sold to each other hamburgers. It isn't really creating wealth.

To focus people into the FIRE side of the economy as if that part of the economy is really going to lead to sustainable economic activity is foolish, at best.

Infrastructure is good as well but its slower. If we decided to spend 50 billion dollars on infrastructure right now it would be years before most of the money was spent into the economy.

Sure, and 3 years later while our economy stagnates it sure would be nice to see some of that building being done, creating jobs, and creating long lasting assets that will ensure our economy will be productive for years to come.

Instead, we have people buying houses at ever increasing prices while their debt/income ratios balloon beyond the stupidity of the average American.

Edited June 22, 2012 by msj

[dre]

Sure, but lending money for home reno's and giant Dodge Ram's in the driveway isn't exactly a productivity booster in the long run.

Buying and selling of RE is not much different than if we all bought and sold to each other hamburgers. It isn't really creating wealth.

To focus people into the FIRE side of the economy as if that part of the economy is really going to lead to sustainable economic activity is foolish, at best.

Sure, and 3 years later while our economy stagnates it sure would be nice to see some of that building being done, creating jobs, and creating long lasting assets that will ensure our economy will be productive for years to come.

Instead, we have people buying houses at ever increasing prices while their debt/income ratios balloon beyond the stupidity of the average American.

Yer preaching to the choir msj. Im not arguing with you just giving you my take on why they do what they do.

[Moonbox]

Instead, we have people buying houses at ever increasing prices while their debt/income ratios balloon beyond the stupidity of the average American.

well I agree with you, except we're nowhere near as bad as the Americans in this regard.

[dre]

well I agree with you, except we're nowhere near as bad as the Americans in this regard.

Yes we are. Based on the numbers we are almost in exactly the same boat as Americans were prior to the mortgage meltdown. Same bubble, and same low savings rate.

[msj]

Yes we are. Based on the numbers we are almost in exactly the same boat as Americans were prior to the mortgage meltdown. Same bubble, and same low savings rate.

Vancouver is way worse than anything in the US. Vancouver is pretty much #1 (or tied for #1) in the world for being overpriced based on price to median income.

Toronto is approaching worse than most of the US when it had its bubble.

Not all of Canada, sure, but about 20% of Canada.

Throw in other places like Victoria, other parts of Vancouver Island (where I am), and other parts of Canada where prices are absurd and I would think that it is easily 30%+ of Canada that is absurdly priced.

Bet the US was about the same - Texas, for example, didn't have much of a run up in prices so they didn't have a run down either.

[dre]

Vancouver is way worse than anything in the US. Vancouver is pretty much #1 (or tied for #1) in the world for being overpriced based on price to median income.

Toronto is approaching worse than most of the US when it had its bubble.

Not all of Canada, sure, but about 20% of Canada.

Throw in other places like Victoria, other parts of Vancouver Island (where I am), and other parts of Canada where prices are absurd and I would think that it is easily 30%+ of Canada that is absurdly priced.

Bet the US was about the same - Texas, for example, didn't have much of a run up in prices so they didn't have a run down either.

I ran across this report from a Capital Management company... I thought it was quite good.

http://www.pacificapartners.com/blog/2012/03/15/canadian-housing-bubble-chart-book/

Theres a bunch of good charts there... Comparisons of rent costs vs home costs, home costs vs income, mortgage debt as a percentage of GDP, etc etc.

THe scary thing is the government knows how bad things are, and they are terrified to raise the rates... and if they dont raise the rates soon we are going to start seeing bubbles form in other asset classes as well.

[scribblet]

I think it is a great idea. I mean I thought I was stupid when they over heated the market by bringing in the 30 year mortgage in the first place. It is good to know that sometimes even if it takes them a million years they can learn from their own mistakes. It is good they have admitted they were wrong when everyone on the left told them they were wrong 5 years ago and have corrected their own error.

The error didn't last long, less than a year, the Conservatives corrected it twice ( or 3) times since 2006 will this be the 4th...

This is only CHMC right, people can still load up on debt with a private lender.

Edited June 22, 2012 by scribblet

[punked]

The error didn't last long, less than a year, the Conservatives corrected it twice ( or 3) times since 2006 will this be the 4th...

This is only CHMC right, people can still load up on debt with a private lender.

Yep sure whatever you say.

[wyly]

we'll see what this does to the unemployment rate, the Calgary housing market was already cooling before this change...the new home and reno industry are huge employers and drivers of the economy...the new rules were put in place essentially to cool two markets, Toronto and Vancouver but will hit all of canada...so the government is kicking the biggest industry in Canada in the teeth while supporting another(energy)carte blanche...does this exacerbate "dutch" disease even more?

I'm not saying what was done was right or wrong but was it the right time to do it?...was there another way to cool down two overheated markets? Vancouver's market was being driven by overseas investors not canadians( I don't know about Toronto)maybe a restriction on foreign owned mortgages may have been the answer...

Edited June 23, 2012 by wyly

[scribblet]

Yep sure whatever you say.

I do say, because it's true.

[msj]

we'll see what this does to the unemployment rate, the Calgary housing market was already cooling before this change...the new home and reno industry are huge employers and drivers of the economy...the new rules were put in place essentially to cool two markets, Toronto and Vancouver but will hit all of canada...so the government is kicking the biggest industry in Canada in the teeth while supporting another(energy)carte blanche...does this exacerbate "dutch" disease even more?

Yes, construction is a bigger part of the economy.

That's what happens when a government changes the rules to 0% down and 40 years amortization in 2006 and the Bank of Canada lowers rates and keeps them low for years.

Thrown in one year of "home renovation tax credit," changes to RRSP to allow people to "borrow" even more from their RRSP's, and first time home buyer's tax credits and it's no wonder people have gone gonzo for houses.

I'm not saying what was done was right or wrong but was it the right time to do it?...was there another way to cool down two overheated markets? Vancouver's market was being driven by overseas investors not canadians( I don't know about Toronto)maybe a restriction on foreign owned mortgages may have been the answer...

Undoing what should not have been done in the first place is always a good thing to do no matter what the timing.

In fact, the complaint isn't about the timing but the fact that Harper/Flaherty never should have been so bone headed in the first place.

As for Vancouver's market being driven by "overseas investors" - don't count on it.

There is only anecdotal evidence for it from people who are unable to determine if that "hot Asian money" is from China or from bona fide Canadians (yes, many Canadians were born in Canada who happen to look Asian).

As for the "investor" part - well, that's just silly.

They are part of the herd.

Jumping on the band wagon following regular Canadians into the bubble.

People who pay 30 times annual rent to own an "investment" are fools.

[Martin Chriton]

It seems almost certain there will be a US-style housing correction within the next few years -- given the data. The sad part is Canada has the benefit of hindsight which other countries did not have.

If I owned Canadian real-state I would sell now. Especially if I owned a Toronto condo. Very little chance of appreciation in the next 4-7 years and high chance of a crash. Easy sell.

If you sell now and buy again after the crash you could save/make hundreds of thousands of dollars. I live in California now and those that sold pre-peak are very pleased with how things turned out.

Edited June 24, 2012 by Martin Chriton

[Moonbox]

It seems almost certain there will be a US-style housing correction within the next few years -- given the data. The sad part is Canada has the benefit of hindsight which other countries did not have.

What are you basing this on, exactly? We'll have a housing correction, sure. These things ALWAYS happen eventually. Will the housing market implode and will the banks fall apart like in the US? Nope.

If I owned Canadian real-state I would sell now. Especially if I owned a Toronto condo. Very little chance of appreciation in the next 4-7 years and high chance of a crash. Easy sell.

It's pretty easy to come up with genius advice like this after the government pulls the rug out from underneath the housing market.

If you sell now and buy again after the crash you could save/make hundreds of thousands of dollars. I live in California now and those that sold pre-peak are very pleased with how things turned out.

If you can arrange to put the place up for sale, find a buyer and have them arrange financing within the next week or so, you might do well yeah, but good luck with that. My bet is we'll see prices fall in Toronto EXTREMELY soon.

[Fletch 27]

I'm agree.. I think Toronto will slow in 8 months time.. Maybe a year.. Rates will remain un-changed till 2014 (my bet is even later) and "homes" (detatched) will increase in demand outside of "Toronto"(when money is basically free, why buy a crappy condo when you can live like a civilized human being?). The GTA will remain hot till 2015.. I can't see it remaining "HOT" after that then a softening... Or a flatening. The crisis in the EU has guaranteed low rates till 2015 or later...

What are you basing this on, exactly? We'll have a housing correction, sure. These things ALWAYS happen eventually. Will the housing market implode and will the banks fall apart like in the US? Nope.

It's pretty easy to come up with genius advice like this after the government pulls the rug out from underneath the housing market.

If you can arrange to put the place up for sale, find a buyer and have them arrange financing within the next week or so, you might do well yeah, but good luck with that. My bet is we'll see prices fall in Toronto EXTREMELY soon.

[dre]

we'll see what this does to the unemployment rate, the Calgary housing market was already cooling before this change...the new home and reno industry are huge employers and drivers of the economy...the new rules were put in place essentially to cool two markets, Toronto and Vancouver but will hit all of canada...so the government is kicking the biggest industry in Canada in the teeth while supporting another(energy)carte blanche...does this exacerbate "dutch" disease even more?

I'm not saying what was done was right or wrong but was it the right time to do it?...was there another way to cool down two overheated markets? Vancouver's market was being driven by overseas investors not canadians( I don't know about Toronto)maybe a restriction on foreign owned mortgages may have been the answer...

Its not just two overheated markets, theres pretty serious over-valuation. And if credit stays too easy for too long it will spread to other asset classes as well. Easy credit isnt just propping up realestate values its propping up consumer spending as well. If they dont tighten up credit soon they will cause a huge recession soon, but they also risk causing a recession if they make any big bold moves. Thats why youre seeing baby steps like this and small measured rate hikes here and there.