The tightening measures announced by the Department of Finance on October 3 are the most recent in a long list of initiatives over the past eight years designed to cool housing markets, particularly in Vancouver and Toronto and surrounding regions. Today’s report is apparently justification for the most recent policy moves, rather than anything new. In other words, the report is looking in the rear view mirror.
At least in part, the government has itself to blame for the boom in housing. I am struck by a recent report by Derek Holt at ScotiaBank that reminds us of all the measures the government took to spur housing prior to the financial crisis. Most notably–allowing RRSP withdrawals for home purchases in 1992, introducing 40-year amortization periods and 0% down payments in 2006, the zero down payment insured investor mortgage (for non-owner-occupied housing purchases) with a high amortized premium in 2007, and offering first-time home buyers tax credits in 2008 and 2009. Clearly, the surge in household debt relative to income was at least in part generated by these politically popular actions, which fueled the already strong demand generated by the decline in interest rates to ever-lower levels.
Since October 2008, the government has been scrambling to overturn these measures and more. In a series of steps, maximum amortization periods have been reduced from 40 to 25 years, minimum down payments increased from 0% to 5%, and stress tests to qualify for a mortgage have been tightened. Refinancing ceilings have also been reduced over time from 95% to 80% loan-to-value and, for buyers of non-owner occupied housing, a 20% minimum down payment has been imposed. All this happened before the most recent initiatives, which tighten mortgage conditions significantly further, as well as impose disincentives for foreign purchases.
The growth in the demand for housing will no doubt slow in response. What has yet to be tackled is a reduction in government impediments to an increase in the supply of affordable housing that is particularly lacking in Greater Vancouver and Toronto.
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Dr. Sherry Cooper took the position of Chief Economist, for Dominion Lending Centres in early 2015. Prior to joining DLC, Dr. Cooper was the Chief Economist with one of Canada’s largest financial institutions and is well versed in the mortgage sector. Dr. Cooper has an M.A. and Ph.D. in Economics from the University of Pittsburgh. She began her career at the United States Federal Reserve Board in Washington, D.C. where she worked very closely with then-Chairman, Paul Volcker, a relationship she maintains today. After five years at the Federal Reserve, she joined the Federal National Mortgage Association as Director of Financial Economics.