Debt and Housing Bubbles

More commentary has come out on the exceptional levels of household debt in Canada.  These sometimes speak directly to the issue, such as described in the Borrowing Binge in the Vancouver Sun, or as a negative outlook provided by Moody’s when assessing the exposure of Canada’s banks.  The latter makes explicit references the level of Canadian mortgage debt having doubled in the last decade.

UBS, the Swiss international bank, released a report that  ranks Toronto and Vancouver as two of the top four cities in the world with ‘over-priced’ markets, likely to experience ‘corrections’ in the coming months.  And a report from RBC views housing affordability as ‘the worst ever’, and lists Vancouver as the ‘least affordable city in the country.

Policies of the government of Canada have driven this exceptional investment in residential property, in part fanned by low interest rates.  In the recent past government has moved to tamp down the incentives that drive people into the market and consequently drive up prices.  The mortgage insurance program, administered by Canada Mortgage and Housing Corporation, now requires larger down payments and requires higher income levels (for mortgages where the loan to value exceeds 80%).  And recently, the Office of the Superintendent of Financial Institutions (OSFI) proposed higher debt servicing tests for conventional mortgages provided by federal financial institutions (where loan to value <80%).

These measures are good economic policies.  They will moderate the number of buyers by reducing the availability of easy credit, and that will temper the pressures on prices.

But the measures will end an era of relatively easy growth and profitability for banks and other lenders.  Residential lending has been good for banks and the economy, as we have pushed a real estate based recovery since 2008.  But now we need to put on the brakes and there will be resistance from the institutions that have enjoyed the ride.

The Canadian Credit Union Association (CCUA) has joined the chorus and asked OSFI to reconsider.  Their argument is that the higher debt service threshold will disadvantage lower income households most.  This is a self-serving argument.  Indeed, continuing to fan the demand for housing is also likely to leave many lower income households in hardship, as it is doing already.  Those who benefit most from a hot housing market are not those modest income households.

The CCUA submission also worries about possible declines in the market value of properties.  This would be a boon to purchasers, and is likely necessary as a market ‘correction’ after an extended bull market run.  But this again reveals the self interest of the argument, lenders do not want the devaluation of properties they have loaned against.

I think credit unions have to see the bigger picture, the interests of the larger community, and not simply promote policies that promote easy credit.



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