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Real Estate Stress tests won’t fix Canada’s heated housing market

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Finance Minister Bill Morneau should be applauded for trying to bring a little more sanity to the real estate market.

Tightening access to mortgage insurance is a no-brainer because it will encourage more discipline among buyers and lenders.

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And cracking down on sellers, including foreigners, who duck paying capital-gains tax is long overdue.

But don't expect the measures, announced Monday, to have a dramatic or immediate effect on Canada's frothy housing market. That's because the big factors moving the country's hottest markets are largely beyond its control – rock-bottom interest rates, an influx of Chinese money and a scarcity of single-family houses in cities such as Toronto and Vancouver.

The announcement is as much about being seen to be responding to Canada's national preoccupation as it is about fixing the problem.

Speaking to reporters, Mr. Morneau said he wants to curtail "excessive risk" and ensure tax fairness.

It's not clear how the plan will relieve the challenge facing prospective young buyers who are being priced out of the hottest markets.

Consider the potential impact of the stricter mortgage-insurance rules. The measures will have no effect on the roughly three-quarters of new mortgages in Canada that are not insured because the buyer puts down more than 20 per cent of the purchase price in cash. Nor will it affect all-cash transactions, which make up a significant share of foreign purchases.

Among the new measures, Ottawa will require a stress test for all new insured mortgages, effective Oct. 17. Buyers will have to show they can handle higher interest rates than they are actually paying to qualify. The Finance Department acknowledges that this will have a relatively modest impact, affecting fewer than 10 per cent of sales nationally.

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A second measure targets lenders who buy insurance on pools of low-ratio mortgages that don't require mortgage insurance. The government says it doesn't have data on how much mortgage activity will be affected.

The government, likewise, says it doesn't know how much tax revenue it may be losing because sellers are inappropriately claiming the capital-gains exemption on a primary residence when they don't actually live in Canada. A recent Globe and Mail investigation revealed widespread abuse of the exemption by foreign buyers in the Vancouver area, where owners are falsely claiming Canadian residency for themselves, their spouses or their children to avoid paying tax on houses they flip for a profit. The extent of the tax abuse nationally is unknown.

In this case, the government may well be tackling yesterday's problem. There is considerable evidence that the Vancouver market is already cooling. Sales in Greater Vancouver dropped 26 per cent in August and 19 per cent in July, following the province's introduction of a tax on foreign home buyers. Prices increases have also begun to moderate.

The incentive for foreign buyers to buy and flip houses is a lot less attractive if prices aren't rising 30 per cent a year.

Mr. Morneau can't do anything directly about the low-for-long interest rate environment that is preoccupying Bank of Canada Governor Stephen Poloz. In a speech last month, Mr. Poloz warned that central banks around the world are dealing with powerful global forces that are keeping rates low, including weak business investment and waves of retiring baby boomers leaving the labour force.

Nor can the federal government do much about the dearth of land available for new housing development in many cities. A recent report by the Ottawa-based Macdonald-Laurier Institute found that restrictive provincial and local government land use regulations, development fees and zoning rules are keeping builders from adding to the housing stock in many cities.

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The federal government is currently developing a national housing strategy to address the affordability problem. But the effort appears primarily directed at the rental end of the market.

Given all that, Mr. Morneau is left with few effective tools to curb high prices and excessive borrowing, beyond coaxing buyers and lenders to behave.

Just like B.C.'s tax on foreign buyers, this latest federal announcement is Ottawa's effort to talk some sense into buyers and lenders in a market that chronically refuses to come in for a soft landing.

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