Is Canada in a housing bubble? If it’s not, it’s getting dangerously close to that point. But who’s to blame for it? According to Jim Flaherty, it’s partly the fault of the builders and developers in hot markets like Toronto who continue to build. But the banks part in it can’t be overlooked, and the Finance Minister calls many of their actions downright “irresponsible.”
Speaking to The Globe and Mail’s editorial board on Friday, Flaherty spoke of many things that worried him. At the top of the list were the home sale prices that seemed to be going nowhere but up in Canada; the amount of credit debt and home loan debt that Canadians are taking on; and in particular, the Toronto condo market. Flaherty says that builders and developers aren’t considering the current market conditions as they prepare the blueprints for their next condo building; and that they’ll just continue to build as long as people continue to take out Toronto mortgages to buy them.
“I do worry about the last person buying a condo in Toronto and getting caught,” said Flaherty. “I also talk to developers, and I hear from some of them who are in the business of building condos that they don’t really have a plan, they’re just going to keep building them until people stop buying them. It’s not exactly a fiscal plan. It will lead to a crash.”
But what’s equally as worrisome are the mortgage wars that so many of the major lenders in Canada have been taking part in, according to Flaherty. He worries that when banks discount their rates as low as as 2.99%, as they have twice already this year, it encourages people to take out mortgages – people that might not exactly be able to afford them. And that, he says, is exactly what led to the crash in the U.S. Flaherty was so concerned about the mortgage wars in fact, that he had a private word with many of the banks’ CEOs.
He told the paper on Friday that he told them, “You should be cautious about your lending practices, because this is the type of practice that led to a mortgage crisis in the United States several years ago. So my expectation is that you will not compete to the bottom on interest rates, which is the direction he was going.”
Flaherty says that since that time, the banks have taken the appropriate steps to reign in their mortgage market and make it tougher for people to get mortgages – especially those developers who are trying to build all the condos. Tougher restrictions have been placed on these loans, and it no longer looks as though the banks are going to do whatever necessary to get the major market share.
He also spoke of the changes and rules that Ottawa has imposed – tightening HELOCs, shortening amortization periods and most recently, changing the oversight of the CMHC and the way they handle covered bonds. “We’re doing these reforms now, we’ll see how it works. We have a fair amount of information about what’s there [in covered bonds] so give us another year or so. I think we’ll have an even better handle on CMHC from a securitization point of view.”
