When Finance Minister Jim Flaherty tightened up Canadian mortgage rules last July, there was concern that his move would not only take the froth out of Canada's housing market, it might cause a plunge in prices and sales. The market did slow, but the bounceback came quickly. Now, just a year later, there is a remarkable vigour in residential real estate.
July statistics released Thursday by the Canadian Real Estate Association show that the average price of a house across the country rose 8.4 per cent from a year earlier, while the number of sales was up 9.4 per cent. Even in Vancouver, where the market had slipped sharply, sales were very strong.
Over all, housing has remained resilient, and fears of a meltdown were clearly unfounded. As BMO Nesbitt Burns senior economist Robert Kavcic describes it, the Canadian housing market is "balanced and well-behaved."
This shows Mr. Flaherty did the right thing in tightening the rules. He cooled the market without dousing it. The rule changes he introduced last year – which, among other things, cut the maximum length of an insured mortgage from 30 years to 25 years – were the fourth set of adjustments from this government. But they elicited the most dire warnings. The mortgage brokers association, for example, insisted that the changes would "jeopardize the health" of both the housing market and the overall economy. They were wrong, and Ottawa should not fear taking further action if the market gets frothy once more.
It is important to make sure homebuyers do not overextend themselves just because rates are low. Many Canadians have no flexibility to handle higher costs that will come with even a small increase in mortgage rates.
There is danger in complacency. Rates have been at rock bottom for years now, and many young people coming into the housing market for the first time have no idea what it is like to juggle the substantial payments that are required when a mortgage rate is at six or seven per cent or higher. It is inevitable that rates will rise, and some people will not be able to afford their houses when it is time to renew.
Canada's housing market has considerable momentum, and putting on the brakes occasionally to keep it under control is necessary, and sensible.