Calming Canada's housing market

Canadian Finance Minister Bill Morneau has announced new measures to ensure that the inexorable rise in housing prices does not lead to a crisis at some time in the future. Morneau's Tory predecessor, the late Jim Flaherty, attempted something similar at the peak of the global financial crisis, and is widely credited with ensuring that Canada was spared the the worst effects of that meltdown.

Foreign buying of Canadian properties is widely seen as one of the major causes of rising house prices, especially in Vancouver and Toronto. During the summer, the government of British Columbia imposed a 15 percent tax on foreign purchases, and the early signs are that the market has cooled somewhat in response.  Despite self-serving protests from Toronto realtors, it seems very likely that Ontario will have to follow BC's lead in the near future.

In the meantime, Morneau has also taken aim at foreign buyers.  Canadians are allowed to sell their principal residence without incurring capital gains tax.  It appears that foreign buyers of Canadian property have been taking advantage of that exemption when they sell up, even though they may never actually have lived in the home at all.  From now on, a property owner will only be eligible for the exemption if he or she was resident in Canada at the time of purchasing the property.

This change should have two beneficial effects.  First, it should produce at least some revenue for the Federal Treasury, though the amount is unlikely to be significant, at least in the short term.  Second, it should immediately reduce the incentive for foreign buyers to invest in Canadian real estate, which should in turn relieve some of the upward pressure on prices in cities such as Vancouver and Toronto.

Morneau's other major change will affect domestic buyers seeking mortgage financing.  At present, borrowers seeking insurance for high-ratio mortgages (which mostly means first-time buyers with low down payments) are subjected to a stress test to see if they could continue to service the debt if interest rates were to rise.  After mid-October, this test will be applied to all borrowers applying for mortgage insurance.  This change will reduce the amount that banks can lend to a large swath of borrowers, which should in turn reduce pressure on house prices (and, as important, on bank balance sheets).

This change is likely to have more impact in the short term than the crackdown on foreign buyers, a fact that Morneau has recognized by delaying its introduction by two weeks so that deals already in the pipeline can proceed.  The inexorable rise in the household debt/disposable income ratio has been raising alarms from Ottawa to the OECD to the IMF for many months.  With no end in sight to the Bank of Canada's low rate policy, Morneau has evidently decided that he cannot simply allow household debts to pile up ever higher, since that simply ensures an even bigger crisis when rates finally do start to rise.

Much of the commentary on today's measures is of the "too little, too late" variety. Possibly so, but at least Morneau is trying, so let's be more positive and say "better late than never".