Bubble trouble? No, it's our thirst for debt

People, a housing bubble's not the problem.

Do we have a real estate bubble in Canada? The answer's not certain, but by most measures, it's no. Yet the subject dominates headlines and discourse about the economy right now.

What is certain is we should stop spending so much time focusing on the dreaded bubble. Given what's just transpired in the U.S., a little paranoia is warranted, but obsession is not.

That's because the constant bubble debate is distracting Canadians, and the federal government, from the real risk that is most definitely building in this nation, and that is increasingly stressed consumer balance sheets.

So let's stop for a second and consider something: Isn't it possible that, just maybe, experts at places like the Bank of Canada and the International Monetary Fund are right and prices aren't all that out of whack in Canada, and that the real issue is not what we're paying for houses but how we're paying for them?

There's not much concrete research behind the viewpoint that there is a bubble. The argument comes down to the fact that house prices are at record highs, and have risen pretty fast by some measures, most notably the average resale home price calculated by the Canadian Real Estate Association.

Of course, by other measures, such as the new home price index, home prices haven't risen nearly as quickly.

What's more, there's little sign of speculative flipping. How many of your neighbours own two or three houses, and are just waiting until prices rise to unload them? Not many, one suspects.

In the U.S., that was a prevalent practise. In Canada, residential investment properties are usually geared to long-term income from renters, rather than short-term gains from flipping. National vacancy rates indicate about 97 per cent of those income properties are full.

For those reasons, Canada doesn't have the mounting oversupply of homes that characterized the pre-meltdown building U.S. bubble. Housing starts have generally tracked the rate of growth in households seeking homes.

A study released in October by an IMF researcher concluded that, even using the CREA numbers, prices in this country were "close to equilibrium," where supply and demand are balanced.

In other words, it's not clear whether a reasonable person should be seriously concerned about a bubble. Watchful, sure. Terrified? No.

On the other hand, any reasonable person looking at the growth in Canadian household debt should definitely worry.

Debt to household income is approaching 150 per cent and the pace of growth is picking up. The trend line shows nary a pause for almost a decade, not even for this recent recession.

Canada is now where the United States was in about 2004 on this key measure, and while the U.S. consumer is now paying down debt, Canadians continue to pile it on, mostly via mortgages. Even with interest rates remaining low, debt payments are eating up more Canadians' income as a result of the sheer volume of money they owe.

This is what seems to have Bank of Canada Governor Mark Carney concerned.

Yet there is opposition in many quarters to serious change that would force Canadians to borrow less when they buy a home to slow the growth of household indebtedness.

Many in the mortgage industry argue that the call from big bank chief executives for higher down payment requirements and shorter amortizations is misguided. The opponents of higher down payments or tougher borrowing requirements say Canadians can handle the debt payments for now, so why not let them take it on? After all, there's been no crisis yet.

Jim Flaherty, the Finance Minister, is another one of those who seems reluctant to push for serious change that would restrain the pace of consumer borrowing, instead focusing on small changes such as marginally tightening the rules around stress-testing Canadians' ability to make their payments at higher mortgage rates.

Mr. Flaherty doesn't want to slow the economy too much by restricting borrowing, say those party to the behind-the-scenes debates. In other words, he wants Canadians to keep borrowing and spending just like the federal government is doing.

And besides, he's focused on the straw man of the bubble. No bubble, he says, so no need to act.

But maybe we don't need to increase required down payments to 10 per cent to cool the housing market. Maybe we need to do it because Canadians need to have less debt.

Maybe the right rationale for policy makers looking at cutting allowed amortizations from 35 years to 30 years shouldn't be to fight a bubble that may or may not exist, but to force some borrowing prudence down the throats of Canadians.

If we have a bubble, it's a symptom of our unwillingness as a nation to reign in our borrowing, not a cause. Nobody's forcing us to run up our personal debt by taking on a 35-year mortgage with only 5 per cent down to get into the housing market or to trade up to a swankier address.

But Mr. Flaherty could force us to stop.