Ottawa under pressure to cool housing markets in Toronto, Vancouver

Theglobeandmail.com
June 1, 2016
By David Berman and Tamsin McMahon

Fresh warnings are being issued about the Vancouver and Toronto real estate markets as a growing chorus urges further action from Ottawa amid a continual rise in housing prices.

Bank of Nova Scotia’s chief executive officer raised concerns about the two urban markets, calling them “frothy” and asking the federal government to introduce specific measures to rein in prices.

“The government has lots of levers to deal with this,” Brian Porter said during an interview.

“So the question is not about the banks, it’s about the government doing something about it.”

He suggested three potential solutions: raising down payments, increasing the qualifying rate for five-year fixed mortgages and imposing a temporary luxury tax on foreign buyers.

“We’ve been encouraging the government to do some things here, and we’ve been consistent for years,” Mr. Porter added.

“We have a new government in Ottawa, so it takes time. We understand that. But this is important stuff.”

Lenders are reluctant to take steps to cool mortgage lending - a key driver of profits - on their own and would prefer government regulations be put in place that would create a level playing field across the board.

While banks are free to impose their own lending restrictions, moving unilaterally would introduce competitive disadvantages if rivals fail to follow.

Mr. Porter’s comments come as housing price increases in Canada’s two hottest real estate markets show no signs of slowing down. The Canadian Real Estate Association reported that the benchmark price for a house in Vancouver in April surged more than 25 per cent at an annualized rate.

On Wednesday, the Organization for Economic Co-operation and Development once again raised its own concerns. In its economic outlook report, it warned of the risk of a disorderly housing market correction as low borrowing rates have “underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market.”

“Macroprudential measures have strengthened recently but should be tightened further and targeted regionally,” the OECD said.

Canadian authorities have introduced limited measures recently that are designed to curb housing market excesses - for example, capping amortization periods at 25 years and imposing a minimum down payment of 20 per cent on investment properties.

In December, the Department of Finance doubled the minimum down payment to 10 per cent for a portion of some large mortgages. Louis Vachon, CEO of National Bank of Canada, told Bloomberg on Wednesday that minimum down payments should rise to 10 per cent for all mortgages over time.

Also in December, the Office of the Superintendent of Financial Institutions proposed that banks should hold more capital against riskier mortgages and Canada Mortgage and Housing Corp. (CMHC) said it would increase the fees it charges lenders that use its mortgage-backed securities program.

But the measures appear to have done little to hold back housing price increases in key markets, or curtail views that authorities should be doing more to cool things down.

A recent report from economists at Royal Bank of Canada said valuations for single-detached properties in Vancouver and Toronto are “sky-high” and defying local fundamentals.

Benjamin Tal, an economist at CIBC World Markets, believes the situation could grow worse over the next few years, with more foreign money likely entering Canadian real estate markets amid regulatory and monetary changes in China, putting pressure on Canada to react.

“Applying a flipping tax on foreign investors might be a step in the right direction,” Mr. Tal said in a recent research note. “It won’t solve the problem, but it might be an effective way to remove the most problematic element of foreign investment in Canadian real estate.”

Victor Dodig, CEO of Canadian Imperial Bank of Commerce, added his voice to the conversation about surging housing prices, remarking at the bank’s shareholder meeting in April that B.C. Premier Christy Clark and Prime Minister Justin Trudeau have identified housing affordability as an issue.

“We will be an active participant with government in working on a solution,” Mr. Dodig said, although he didn’t add details on what the solution might look like.

In an interview with The Globe and Mail in February, Evan Siddall, CEO of CMHC, said government cannot fine-tune the market.

However, he proposed a risk-sharing arrangement that would see the banks shouldering some of the mortgage risks now held by the government with its mortgage insurance programs.

“It’s a better system if the people who are managing the risk day to day, banks, lenders, have some exposure to that risk. If they don’t, then we have to rely on regulation,” Mr. Siddall said. “I suspect we’ll start talking more about it actively later this year as to what makes sense.”