Canada is doing its best to avoid the housing woes experienced by its neighbor to the south. A new set of mortgage reforms will make it even harder for Canucks to borrow. Yet ultra-low interest rates keep feeding a residential real estate boom that three previous government initiatives haven’t stopped. Prudent regulation can only limit so much the distortions created by easy money.
A few important policies have helped inoculate Canada. While Americans can generally walk away from a home loan without penalty, Canadians don’t have that luxury. Mortgage interest isn’t tax-deductible in the Great White North. And regulations forced Canadian banks to keep more loans on their books. All this encouraged greater prudence.
Yet there are worrying signs something still isn’t quite right. Canada’s debt-to-income level has rocketed to more than 150 percent, higher than in the United States. Bank of Canada Governor Mark Carney just warned about the proportion of housing investment in the economy. And more than 7 percent of employees work in construction. That’s above the rate reached in the United States at the height of the boom.
What’s more, prices are still rising. Over the past three years, the average house nationally is worth 20 percent more, according to the Canadian Real Estate Association. Prices in Toronto have increased 30 percent. And Vancouver home values shot up so much they inspired a website daring visitors to discern a local crack house from a luxury mansion. There’s no better incentive for financial recklessness than watching neighbors get rich from imprudence.
Stricter limits on government-backed mortgages with a loan-to-value ratio over 80 percent will help. So will making borrowers repay faster, lowering the maximum amount lent against a borrower’s salary and limiting guarantees to homes worth less than $1 million.
With few signs of inflation, however, along with weakening growth in Canada and abroad, ultra-low rates globally and safe-haven seeking investors crowding into Canada, the chances of the central bank tightening its 1 percent overnight rate any time soon seem slim. That means that even with Canada’s regulators trying to suck the air out of housing, excessive monetary stimulus will keep inflating it.