Flaherty Cools Real Estate Market at the Wrong Time

Jim Flaherty's continued obsession with the "hot" Canadian housing market has resulted in yet a further restriction on CMHC insured mortgages and raised the monthly costs of borrowing significantly.   Reducing the percentage of values of homes being refinanced from 85% to 80% and eliminating $1 million homes from CMHC insurance eligibility is probably prudent to reduce unnecessary debt burdens being created and insured by a federal agency whose primary goal should be to assist first time buyers get into the housing market.   Reducing the gross debt service ratio from 44% to 39%, will also shrink the numbers of borrowers or limit the extent of their borrowing. But that is prudent fiscal management.   However, the further reduction of the maximum amortization period from 30 years to 25, the third such reduction in three years, will have severe and negative impacts on the ability of new and used home buyers to get into the market and as a result, may have more than a mere "slowing down" impact on the new home industry, which has been a large driver of the Canadian economy while the rest of the world languishes and teeters on the brink of another recession. The reduction is the equivalent of a 1% interest rate increase for those 40% of borrowers who were seeking the higher amortization. That could translate into at least a 10-15% increase in borrowing costs. Very significant, especially to first time buyers, the big drivers in the market. Yes, this brings us back to the amortization levels of the '90s, but is it necessary when we need economic stimulus in a slowing market?   Mr. Flaherty seems determined to hammer away at an industry that has really 2 "hot " real estate markets - Vancouver and Toronto. Vancouver has been slowing since last summer, and Toronto has seen a marked slowdown in sales and price increases, for both new and resale homes, over the last 2-3 months. These artificial moves to impact the market were not necessary and may speed more than just a slowdown in an industry which is one the key employment and economic drivers in the country.   Housing markets have their own market forces that will control supply and demand. There is no need for the government to artificially try and affect the market when it is making its own adjustments.   Sadly, Mr. Flaherty and Mark Carney are listening to all the economic and media doomsayers in trying to manage a perceived housing bubble which he believes is causing Canadians to take on too much debt. Targeting the one successful economic driver in Canada is not the way to do it. The government may get more than they bargained for as a result of these recent moves.   Even the C.D. Howe Institute is of the view that it is now time for the government to leave the mortgage market alone and "let ordinary market stabilizers .... do their work" (http://natpo.st/MEzz8G). Just another example of Canadians not being able to appreciate and support success - whether its their athletes, entertainment stars or their successful companies or industries.   The good news is that the minimum deposit of 5% was left intact. Maybe the government is leaving that change for the fifth round of changes. Lets hope not.   More about what else is happening at CMHC in my next blog.