Canada has lost track of its geographic location, or you would certainly think so if you look at the Canadian housing market. In a year when house prices around the world fell, Canadian house prices rose some 20% in 2009. Yes, Canada was not the only country to see a rapid rise in prices, Australia, New Zealand and several countries in Asia did also, but Canada is certainly the only country on the Americas Land Mass that saw such rapid growth in house prices in 2009. Now the Central Bank and authorities are being forced to take measures to cool the housing market down.
Canadian house prices have risen so rapidly, because the Canadian government acted as quickly and as fervently with its stimulatory measures to stave off the financial crisis as the US, but the Canadian banking system and economy were in nowhere near as bad a shape as their US counterparts. This created the kind of liquidity surge seen in all those other places named above.
The Canadian authorities are now worried that people are borrowing more than they will be able to afford when eventually interest rates are increased from their still-record lows. It would certainly be ironic if Canada caused a crisis in trying to fight one that never really hit it.
In Australia they have already started jacking up interest rates. Canada is in a difficult position in that respect, because they have promised not to raise interest rates until June — the promise itself caused a further transaction surge in the housing market.
So, a set of measures have been announced, which are targeted at reducing people’s access to easy credit. Despite the fact that he dismisses the bubble scenario, Jim Flaherty announced measures last week that make it more expensive to buy an investment property, harder to get a mortgage, and reduce the amount that existing homeowners can borrow against equity in their home.
Mr Flaherty said he wants â€œto discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation.â€
From April buyers of investment properties will be required to pay a 20% deposit, currently they must pay the same 5% paid by residential buyers. Homeowners will only be able to borrow 90% from the equity in their home, they can currently borrow 95% and anyone taking out a short-term mortgage will need to meet the stricter criteria set for a five-year fixed-term loan.
Photo credits: Ian Muttoo via Flickr