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The Globe and Mail

Giving home buyers incentives risks creating a house of horrors

There was fresh evidence this week that Canada's once-sizzling housing market is cooling, particularly in the Toronto area.

Prices across the country fell 1 per cent in October, and nearly 3 per cent in Toronto, according to the Teranet-National Bank of Canada composite price index. The annual pace of price increases is also slowing – to 9.7 per cent in October from 10.5 per cent in September – based on a separate report from the Canadian Real Estate Association.

Conditions vary across the country, but Royal Bank of Canada concluded that "cooler, balanced conditions dominate."

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And that, one would think, is a welcome sign. Recent moves by Ottawa and the provinces to slow borrowing and halt runaway prices, coupled with higher interest rates from the Bank of Canada, may be delivering the elusive soft landing.

But some policy experts want Ottawa to abandon the cautious approach and throw gasoline on the smouldering market embers by making it easier and cheaper for Canadians to buy homes.

Sean Speer and Jane Londerville argue in a new report for the Macdonald-Laurier Institute that the federal government should adopt generous "pro-ownership" housing incentives. Mr. Speer, a former policy adviser to prime minister Stephen Harper, and Ms. Londerville, a real estate finance expert, say current federal policy lacks a clear set of objectives, creating "the equivalent of the Bride of Frankenstein."

Among their proposed fixes: drop the price of mortgage insurance, boost the existing home buyers' tax credit and match funds Canadians put into Tax-Free Savings Accounts to help home buyers put up larger down payments. They would also suspend plans by federal regulators to apply tougher "stress tests" on new uninsured mortgages in 2018.

Whoa. Are they serious?

Those kinds of incentives would be great for the lending business. But they would put the financial system at risk by artificially boosting demand for homes, overheating markets that regulators have worked so hard to cool and encouraging heavily indebted Canadians to borrow even more.

The federal government may take a completely different tack when it releases, possibly as early as next week, details of a roughly $1-billion-a-year national housing strategy. It's expected to focus wisely on rental housing for low-income Canadians, rather than incentives for buyers.

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The most dangerous idea floated in the Macdonald-Laurier Institute report is the proposal to turn the TFSA into a sort of home-buying ATM. The TFSA was originally created because experts worried that Canadians were not saving enough for their retirements. This expensive scheme would encourage people to drain their TFSAs and concentrate their assets in an already-overvalued housing market.

There is scant evidence that Canadians lack incentives to become homeowners. The continued willingness of buyers in Toronto and Vancouver to spend $1-million or more on pretty ordinary abodes suggests they are already amply motivated.

What Ottawa is doing now seems to be working just fine. The home ownership rate reached nearly 68 per cent in 2016, up from 60 per cent in the 1970. In the past decade, Canadian ownership has overtaken that of the United States, in spite of more generous incentives south of the border.

Ottawa already offers generous enticements to buy a home. For example, Canadians are exempt from capital gains on their primary residence, allowing owners to build up equity tax-free. First-time buyers can also borrow up to $25,000 from their registered retirement savings plans.

In the United States, buyers get to deduct mortgage interest from their taxes, even on a vacation property.

The result is that Americans generally have less equity in their homes than Canadians. And they are far more likely to be in arrears on their mortgages.

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Canadian regulators have moved in recent years to discourage excessive and riskier borrowing by requiring larger down payments, shortening the maximum amortization period and making mortgage insurance more expensive – all measures that encourage Canadians to put more money down.

B.C. and Ontario have moved to discourage speculation in the housing market.

It's hard to characterize these mostly sensible policy measures as a horror movie, particularly when they appear to be working.

But beware: If Mr. Speer's and Ms. Londerville's ideas wind up in a future Conservative Party platform, Canada could be looking at a remake of the House of Frankenstein – a place where home buyers mortgage their retirement to join the housing frenzy.

Drawing Conclusions: Understanding the new stress test for uninsured mortgages
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