Canada's housing punch bowl still serving, 12 months later
I was glad to see the Globe’s Boyd Erman join me yesterday in the campaign to deal with Canada’s never-ending mortgage party. Twelve months ago, I described the pending financial hardship that would befall the nice people who were bidding up house prices by taking down 35 year amortizing mortgages with low 5 year interest rates (see prior post “Canada’s housing bubble – time to take away the punch bowl” Dec 23-09). Mr. Erman’s authoritative column will have been read by every relevant official at the Department of Finance and CMHC, and hopefully this will do the trick.
It wasn’t that long ago that you could swing a 40 year amortization mortgage; those were sacrificed at the altar of financial prudence, but we’re still stuck with the 35 year jobbies. According to CMHC’s own mortgage payment calculator, you can spend 15% more for a house (using the same downpayment) merely by moving to a 35 year amortization mortgage from the traditional 25 year version.
If the government really wants to deal with consumer debt, it shouldn’t stop at the 35 year issue; the true culprit is the non-amortizing mortgages that continue to be all the rage. When I looked last July, personal lines of credit were up $80 billion over a three year period (see prior post “Personal credit line balances up 61% since 2007” July 26-10), outstripping mortgage loan growth by $30 billion. Those are likely the home-owners lines of credit all-in-one mortgages. The ones that allow you to spend, each month, what you just paid down in principal.
Since June, the momentum has reversed. Lines of credit are up $5 billion, but outstanding residential mortgages have grown twice that amount. Personal deposits are also up $8 billion, so net debt has definitely increased. Something that we hadn’t seen in the 2007-2009 period (see prior post “Consumer ‘net debt’ not so scary” June 19-09).
Politically, the consumer debt data is difficult to deal with. Bank of Canada Governor Mark Carney can try to warn us, as he did at the Economic Club of Canada on Monday, but the rules are set elsewhere. With a minority Parliament, and the economy slowly growing, it isn’t easy for Finance Minister Jim Flaherty to play the father-knows-best role. Voting intentions among home-owners clearly favour the mainstream parties, and where are all of the new homes being built? In cities and towns that will decide who is in office next time.
Just because it is all so obvious, doesn’t mean anyone has the political temerity to actually douse the housing fire. You can understand the dilemma: a chill in the housing market could pierce consumer and business confidence and undermine the economic recovery.
Debt? We’ll deal with it later.
MRM
Mark, could I play devil’s advocate here for a bit?
– Not every house has a mortgage, and not every mortgage has a 35 year tenor. Currently only 22% of Canadian mortgages exceed 25 years. Could this slice of homebuyers explain all of the price increase we’ve been seeing?
– Not every 35 year mortgage is doomed to fail. In some cases (investors or some young professionals) they could be a suitable tool. Zero-am mortgages are still par for the course in the UK, and in spite of low interest rates, the UK market has seen eroding prices through 2010.
– I think there’s more driving Canadian housing prices than debt funding instruments. My general view is that Canadian housing hasn’t been bogged down by political or economic strain as with the US and UK, and domestic demand is supplemented by immigration (especially into our largest housing markets, our large cities).