Not all markets created equal


The Canadian Real Estate Association likes to point out that not all housing markets are created equal. In fact, housing markets across Canada vary considerably in average price and affordability, whether by city or province.
The above “law” of the Canadian real estate market is one that federal Finance Minister Jim Flaherty decided to ignore last July when he tightened the nation’s mortgage rules. The new rules were intended to cool down the overheated markets in Toronto and Vancouver, but an unintended — although expected by industry observers — consequence was that the otherwise healthy markets in smaller Canadian cities have also taken a tumble downward.
Over the course of four years, Flaherty has lowered the amortization period for government-insured mortgages. In 2008, the amortization period was at a high of 40 years. By June 2012, it stood at 30 years when Flaherty announced the period had been decreased to 25 years, effective July 9, 2012.
In addition, the government got out of business of insuring houses valued at $1 million or more, which has its greatest impact in the larger centres of Toronto and Vancouver. In Winnipeg, there are few houses of this value on the market throughout a given year. At the height of the market, the average home price in Vancouver was around $1 million, but in March this year it stood at $731,000. Last month, the average in Toronto was $508,000. On the other hand, the average house price for the same month in Winnipeg was just over $268,000.
In another move to put a rein on household debt, Flaherty reduced the amount of equity homeowners could take out of their homes in refinancing from 85 to 80 per cent. At the time, the finance minister believed the household debt’s rising spiral would lead to a U.S.-style housing market collapse.
But, according to Canadian economists, any identification with the U.S. housing market bubble that collapsed in 2008 is misguided.
A CIBC World Markets report by Benjamin Tal, the deputy chief economist for CIBC, near the end of last year, said that “any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market.”
While the Canadian household debt-to-income ratio has reached the American record of 2006, Tal said, “this ratio is more a headline grabber than a serious analytical tool.”
In the U.S., the problem was high-risk sub-prime mortgages, which is not and never has been the case in Canada.
“Eradicate sub-prime from the U.S. housing market and, instead of the most severe house price meltdown since the Great Depression, you get a soft landing,” he added.
Americans were enticed into the housing market by low introductory mortgage rates — a “teaser rate” — that quickly ended after two or three years and then the rate skyrocketed, resulting in country-wide defaults.
“Such a trigger does not exist in Canada with mortgage rates likely to rise gradually, allowing borrowers to adjust over time,” explained Tal.
Tal said more attention should be paid to the speed at which the debt-to-income ratio was growing.
Indeed, Bank of Canada Governor Mark Carney by February was claiming that the household debt was less of a concern because it had been moderating, and as time progressed the expectation was that it would continue to moderate. That is one fo the reasons why the central bank has kept its rate at one per cent and it’s expected that this rate will continue well into 2014.
“Notwithstanding the concern of Finance Minister Jim Flaherty that Canadians are taking on too much mortgage debt, it appears that home buyers are not the risk takers he thinks they are,” said Lorne Weiss, a past-president of WinnipegREALTORS® and a regional director for CREA. “The average down payment is 15 per cent (based on putting down $48,000 on a $300,000 home), and in spite of historically low interest rates being offered for variable mortgages, buyers are opting for fixed rate terms at a ratio of almost two to one.”
Will Dunning, the chief economist for the Canadian Association of Accredited Mortgage Professionals (CAAMP), wrote in a recent report that “the vast majority of Canadian mortgage holders, whether they are first-time buyers or long-time homeowners, are acting responsibly when it comes to reducing their mortgage indebtedness.”
A CAAMP survey found that the majority plan to pay off their mortgages in 25 years, and at least a third are taking advantage of current low interest rates to accelerate mortgage payments.
Tal told the Real Estate News that consumer fundamentals in Winnipeg “are in good shape with a relatively healthy labour market and the nation’s lowest personal bankruptcy rate.”
Despite the strong economic fundamentals, Winnipeg’s housing market has been “chilled” over the past couple of months, but not in upper-end sales. What the market is witnessing is a decline in first-time buyers.
WinnipegREALTORS® president Richard Dettman explained that the drop-off in buyer activity in March this year was three times greater in the first-time house ranges ($300,000 and below) than in the upper ones.
The change in mortgage rules added another $150 to the monthly payment on a house valued at $300,000, making it more difficult for first-time buyers to come up with a down payment on a home.
“First-time buyers have less room to manoeuvre, because of the tightened mortgage rules,” said Peter Squire, the market analyst for WinnipegREALTORS®.
Tal said the tightening of the mortgage rules meant to slow down Vancouver’s and Toronto’s housing markets are being felt in other cities such as Winnipeg and Halifax, “although they didn’t need to feel the same pain, and the eventual slowdown will be more than optimal” (Tara Perkins, Globe and Mail, April 16, 2013).
“A lot of cities that had been much better behaved in terms of pricing and overall activity have been hit as hard as Vancouver and Toronto,” Bank of Montreal economist Douglas Porter told Perkins. “Some cities are really taking it on the chin.” 
“Our concern today is the number of growing first-time buyers who are now unable to get a mortgage,” commented Dunning. “We ... hope policy makers  will give some thought to addressing the needs of this key sector of the market.”
Policy makers should also consider that across-the-board rule changes aren’t necessarily the solution to a perceived problem, as all markets are not created equal.