It was the second time in recent days that Bank of Canada Governor Mark Carney voiced concern about property prices, which surged after the financial crisis as borrowing costs tumbled.or
Stalled on the road to recovery
Take last Wednesday’s Globe and Mail. Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney are all over the Report on Business section, fretting that a mortgage price war is duping Canadians into buying homes they can’t afford.
Turn the page, and there’s a survey of 2,300 corporate executives in Canada and 21 other countries. Their big complaint: a lack of capital to grow and innovate.
Cash is pouring into housing, while businesses are starved for capital. Financial markets seem to be turned upside down, creating dangerously skewed incentives that threaten to knock the economy off stride.
In a perfect world, consumers spend prudently, avoid excess debt and save for retirement.
And this piece from the Financial Post, Mortgages Tough new rules planned if market gets too hot
A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.
Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.
“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”
Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.
“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.
” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”
Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.
“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.
He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.
The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.
“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”
A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.
“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”
The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.
The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.
Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.
“The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”
My bet is that something will HAVE to happen sooner than later. Incomes, wages and GDP growth are not growing faster than household credit growth and it is getting to the point that credit growth will at some time NEED to grow slower than the 3 former. I'll be expanding on this in the next post about why a "soft landing" in the Canadian housing market is highly unlikely. But for now some graphs.