The Globe’s Real Estate Beat offers news and analysis on the Canadian housing market from real estate reporter Tara Perkins. Read more on The Globe’s housing page and follow Tara on Twitter @TaraPerkins.
Looking over a 2007 report on Irish real estate last week, I got a chill when I ran across this line: “Most available evidence would now appear to suggest that the housing market appears to be on the way to achieving a soft landing.”
Sound familiar? It’s a line Canadians have been hearing for years, recently from Finance Minister Joe Oliver and the Bank of Canada.
Looking at the Irish experience, that “soft landing” assurance might be seen as more of a warning shot.
That’s not to say the Canadian housing market is poised for a crash the likes of which were seen in Ireland and the United States about six years ago. But Ireland is now looking at Canada with envy when, perhaps instead, we should be learning from them.
Genworth Financial Inc., for one, which sells mortgage insurance in several countries, is suggesting Ireland take a page from the Canadian model.
“Canada has had a universal mortgage insurance scheme in place for over 50 years,” Genworth Canada senior vice-president Winsor Macdonell said in a recent press release, urging the Irish government to adopt a mortgage insurance program.
“During the recent financial crisis, the benefits of this scheme were very evident as the Canadian housing market performed well. The availability of mortgage insurance helped ensure that lenders had the ability and confidence to write new mortgages, making home financing available for first-time buyers at affordable rates.”
Mortgage insurance has indeed played a role in fuelling Canada’s housing market, and economy. It is mandatory here any time a federally regulated bank sells a mortgage to someone whose down payment is less than 20 per cent. The bank is required to buy the insurance, but it makes the home buyer pay the premiums. The insurance pays the bank back if the home buyer defaults – the buyer loses their house, while the bank recoups everything it was owed on the mortgage. The insurance therefore encourages banks to lend bigger and riskier mortgages than they otherwise would.
It is one of the reasons why Canadian banks continued to lend mortgages even in the tumultuous years after the financial crisis. Thanks to that, spending on homes and construction has given the economy a big hand. But mortgage insurance has also inflated home prices by allowing people to buy homes they otherwise couldn’t afford. If the market were ever to crash, those who have overextended themselves will be hit hard.
Many economists believe our house prices are too high. Our market might keep on humming without any significant price correction, it might not. It hasn’t truly been tested yet.
Last week, Bank of Montreal chief economist Doug Porter, who has long defended Canada’s housing market, signalled that he has become more cautious. That’s because he sees three factors propping up the market: rock-bottom mortgage rates, foreign buyers, and the fact that we’re in the peak first-time home-buying years for the large, echo-boom generation (those ages 20 to 38 ). These factors could bolster the market for years yet, but Mr. Porter raises the question, what happens when they dry up?
Ireland emerged from its international bailout program last December, but its housing market remains dysfunctional. The crash cut average property values in half. Many homeowners’ houses are worth less than the amounts they owe on their mortgages. A large number are still behind on their payments. And, with many banks still recovering, the central bank estimates that roughly half of people who bought homes in the past three years likely used cash.
The potential creation of a mortgage insurance framework is now one of 75 “action points” the Irish government is looking at to reinvigorate its construction industry, and the jobs it once sustained.
But a word of advice to the Irish government: don’t envy us just yet. A decade from now, it might be us looking at you with envy, as the worst will be behind you and your market will be stronger for it. In an effort to prevent a reversal in fortunes between the two countries, we should be taking lessons from you – lessons you learned the hard way. Those include the dangers that stem from a lack of adequate data to study the housing market, the dangers of promoting the idea that homeownership is almost always preferable to renting, the dangers of relying on construction for economic growth, and, importantly, the dangers of assuring people that a soft landing is on the horizon.