canada bubble mortgages tax credit

Yet another 21st Century real estate cycle is now inevitable
housing market investment property equity

Cooling the property market -- Slow Canada

The government tries to rein in the housing market without using fundamental fairness, as do governments everywhere. While the moves might succeed north of the US border, author Phil Anderson notes a new bubble is a done deal in the US. This 2010 article is from The Economist, Feb 18 (sent by reader Pia Francesca DeSilva).

by The Economist

Canada has had an easier time than most during the recent global recession, in part because of a conservative and well-regulated banking system. But dangers still lurk. According to data compiled by the Canadian Real Estate Association, average house prices rose by almost 20% in 2009, propelled by low interest rates and generous government incentives. House prices look overvalued on The Economist’s price-to-rents ratio, which stands roughly 20% above its long-run average.

Jim Flaherty, the finance minister, dismisses talk of a bubble. But egged on by a chorus of bankers, economists, and commentators, he is still letting some air out of the market. On February 16th, in what he called a preventive move, the finance minister announced rules that make it more expensive to buy an investment property, raise the financial bar that mortgage borrowers must meet, and reduce the amount that existing homeowners can borrow against equity in their home.

A year ago the federal government was busily encouraging more people to enter the housing market, with a tax credit for first-time homebuyers and an increase in the amount they could borrow from their registered retirement-savings plan. It also indirectly encouraged home-equity loans through a tax credit for home renovations.

Now that fears of recession are dissipating, Mr Flaherty says he wants “to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation.” When the new rules come into effect in April, buyers of investment properties will need to stump up a deposit of 20%, not the 5% minimum required for residential properties. Homeowners who refinance their mortgages will be limited to taking out 90% of the equity in their property, down from 95% now.

Raising interest rates would have been another, much blunter solution to the problem of an overheating housing market. But the Bank of Canada is sticking to its promise to keep its overnight rate at a record low of 0.25% until July, inflation permitting, arguing that an increase “would be dousing the entire Canadian economy with cold water”.

That makes sense. Economic recovery is not yet entrenched. The new rules are more targeted, and can be tightened further if need be. And they are designed to discourage households from increasing their already-record debts rather than to puncture a housing bubble. In particular Mr Flaherty worries that homeowners are taking on more debt than they will be able to handle when interest rates eventually rise. The measures will also require applicants for short-term mortgages at today’s low rates to meet the higher income standards needed for a five-year, fixed-rate loan.

Phil Anderson (Feb 8): "Recent US Federal Reserve and presidential actions to change the banking regulations now guarantee the 21st century yet more awesome real estate bubbles, then further catastrophic busts. Another real estate cycle is inevitable, because the existence of the cycle is disregarded by policy-makers and economists."

"Current suggestions to change the banking regulations in the hope that future asset bubbles will not occur is simply repeating past mistakes. "

Phil’s book, The Secret Life of Real Estate and Banking, has been shortlisted for the UK People's Book Prize ( ; scroll for reader comments). As Director of Economic Indicator Services Ltd, he teaches people how to remember the future. He can be reached at phil at

JJS: The basic solution to bubbles and recessions is geonomics. Have society’s agent -- government -- recover the socially-generated values of land. Then land would no longer be an object of speculation. Since owners would pay land dues or land taxes, instead of burdensome mortgages, the flow of rents would go to the public treasury, not to Wall Street bankers. Wall Street would lose both the means and the motive for gambling on mortgages as deriviatives.

Linex Legal, a New Zealand website that answers a business person’s questions about law in the English-speaking world, states: “Ground rents increase with land values.” (Feb 2) While it’s obvious, the point is, the more valuable your little plot becomes, the more you owe. In a just economy, you’d owe those whom you exclude. And the more they would owe you.

While you may own no more than the land beneath your home, if that, some insiders own downtown blocks, others own bountiful oil fields. A society that adopts the principle of Mutual Compensation means that the vast majority of the members of society would come out way ahead by paying in land dues and getting back rent dividends. They’d be even better off if the land dues replaced most taxes (the counterproductive ones) and the rent dividends replaced most subsidies (the addictive ones).

And the few who wouldn’t immediately gain? Well, they’d have to earn their fortunes. Yet if they’re truly talented, that goal shouldn’t be too onerous, in an economy free of taxes on earnings and of subsidies favoring competitors. While they might not accumulate the grossly enormous fortunes of today in an economy in which everyone prospers, they’ll still have fun accumulating some.


Jeffery J. Smith runs the Forum on Geonomics.

Also see:

As tear-downs sell for millions, for the hoi polloi it's record ...

Home prices rise, but is it for real? Is it for our good?

Rescue the economy or rescue ourselves?

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