The Energizer Bunny marching through the Canadian housing market isn’t banging its drum so hard these days. But it “keeps going and going” in places like Vancouver and Toronto, so regulators are mulling over a further tightening of mortgage rules in Canada.
But as Quebec Finance Minister Nicolas Marceau recently suggested, it may be better to target just the overheated parts of Canada this time around. Elsewhere, house sales and prices are coming off the boil. Clamping down across the board would do more harm than good in their case.
Marceau didn’t indicate what the regional policies could be, so let’s try to connect the dots to see what they might look like—and if they are feasible.
It appears there is no real requirement for amortization periods and other mortgage rules to be the same in every province or city. “I am not aware of any legal reason why mortgage requirements need to be uniform across Canada,” says Ian Lee, a professor at Carleton University. “If you want to get serious about controlling debt and house prices, double the down payment requirement on CMHC-insured mortgages in the overheated areas, or tie it to the size of the mortgage issued.”
But with the high levels of government intervention in housing through CMHC and other channels, “there is an expectation that the rules need to be the same from coast to coast—just like Canada Post charges the same rate for stamps,” Lee explains. “There would likely have to be less government involvement for risk to be calibrated more accurately in the housing market.”
Another regional solution could be to tweak zoning regulations. Relaxing land-use restrictions in some areas would allow more land to come onto the market and dampen price increases, suggests Don Campbell, author of several books on Canadian real estate and founder of the Real Estate Investment Network. Problem is, land-use restrictions are usually enacted for valid reasons such as protecting the environment, reducing urban sprawl and preserving agricultural land. “Tinkering with them would provoke a political backlash, making it unlikely such initiatives would be pursued,” Campbell says.
Yet another solution could be for municipal or provincial governments to use their taxation power. “Doubling rates for land-transfer taxes would likely cool the local housing market,” Campbell predicts. “But this hike would be political suicide and unlikely to happen.”
For CanadianMortgageTrends.com editor Robert McLister, the “downsides outweigh the benefits” when it comes to regional policies. For one thing, if an area like Toronto had more restrictive rules, we “might see mini-bubbles form on the fringes of the area.” It would “also breed social concerns over urban sprawl, excessive commuting times and greater pollution.” In short, regional policies appear to be politically unacceptable and have unwanted side effects, according to experts in the field. Not to be overlooked either is the inducement to black markets as people try to circumvent regional restrictions.
Attempts to dampen the housing market are perhaps unnecessary at this point, anyway. According to data in the Department of Finance’s Budget 2014 document, annual growth in mortgage credit has slowed substantially, and is now way below the average of the last two decades. “This suggests that homebuyers are purchasing homes with larger down payments and that existing homeowners are taking advantage of low interest rates to pay off their mortgages at a faster rate,” the budget says. When Canadians have higher equity stakes in their homes, it imparts more stability to the market.