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Walking the Fine Line of Housing Stimulus and a Housing Bubble

11 March 2013

Finance Minister Jim Flaherty seems to have been walking a fine line with the taxpayers over the past couple of years. Four years ago he increased the amortization periods on mortgages to 40 years – a whopping amount of time, considering how low that could make some monthly mortgage payments. Flaherty was criticized for this move, with the loudest of the bunch saying that he was giving buyers just enough rope to hang themselves with. Then last year, Flaherty shortened many amortizations to just 25 years – and the decision was met with even louder criticism saying he was keeping too many people out of the market. So why is that Mr. Flaherty seemingly can’t do anything right for the taxpayers? And just what exactly is his thought process?

It’s all about perception. And those who don’t want to dig deeper than what’s on the surface, or don’t even bother to read Flaherty’s reasoning for changing mortgage rules, may think that these are all flip-flop moves based mainly on Mr. Flaherty’s mood on any given day. But Mr. Flaherty has already proven himself as a responsible Finance Minister. And if you listen to what he’s saying, it’s clear that he’s walking a fine line that many of us would find extremely difficult.

If the housing market were to ever slow to a crawl, or see its activity stopped altogether, taxpayers would be quick to crucify Flaherty for it. After all, that’s just the concern many have will happen now that amortization periods are so low. Worse than even having to deal with nay-sayers though, our economy would also come to a halt without the current housing market still playing a large supportive role.

Four years ago, that’s exactly why Flaherty lengthened amortizations to 40 years. The housing market needed help, in a big way. Exports were no longer there to uphold the GDP as they had been in years past; and with unemployment rising and concerns of a recession south of the border meant that it was going to have an impact on us, and that we needed all the help we can get. So, the housing market got an injection of that support, and the boom was on!

People started gobbling up homes and mortgages as though they were some kind of last meal. Everybody wanted a mortgage, and just about anybody could get them with high ratio mortgages, cash back mortgages, and lengthy mortgages all part of the packages that were on the table for offer. This had the typical effect it usually does on the housing market, and it didn’t take long for sellers to take notice.

People wanted their homes, and sellers were allowed to pretty much assign whatever price they wanted to their home and be assured that it would still be snapped up. They were, and almost as quickly as people started to talk about a stale housing market, they started to talk about a bubble forming. Prices were truly getting out of hand, and they didn’t show any signs of stopping on their upward slope.

That was when Flaherty stepped in and restricted amortization periods on insured mortgages to just 25 years – yes, let’s remember those short amortization periods are only on insured mortgages! The remaining mortgages still have amortizations capped at 30 years – a perfectly reasonable amount of time to ask someone to pay back a home loan.

This move was made to stem the borrowing, stop the frenzy being seen on the market, and get prices back in line with historical norms. This also seems to be working, as prices are slowly but steadily starting to come down, and sales are too – showing that Flaherty’s strategy was working, and the housing market was slowing down.

Breaking the sequence of events down, and examining exactly why Flaherty made the moves he did, it’s difficult to understand why anyone would be so critical of the moves, aside from partisan loyalties. Flaherty is simply walking the fine line of promoting housing stimulus, and preventing a housing bubble and subsequent collapse. He’s simply doing his job. And from the looks of things, he’s doing it quite well.

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