Will Canada Be Able To Avert A Housing Bubble?

Very few people realize that acquiring a residential property carries much more significance than just arranging a perpetual refuge for them and their family member. In fact, buying a house is also of more significance than simply making an investment in real estate. Actually, owning a residential property is considered to be among the most elementary financial as well as political mainstay in the contemporary social order. Keeping this vital aspect in view, the Canadian government has been virtually offensively cautious not to create any chaos over the issue.

In the midst of ever-increasing apprehensions, especially from the former Bank of Canada governor Mr. David Dodge as well as the several Canadian chartered bank chief executive officers (CEOs) regarding the odds of a housing bubble building up in the country, Mr. Jim Flaherty, the Canadian Finance Minister, has recently launched a number of initiatives intended to calm down the market, albeit a small percentage of it.

Notwithstanding the efforts of the government to quiet down the real estate market, especially the housing sector, many experts are of the view that the concerns regarding the development of housing bubble is totally unfounded. While the Central Bank of Canada has already pledged to maintain low interest rates all through the first half of the year 2010 with a view to assist in invigorating the domestic financial system that received a severe beating during the recent global economic slump, numerous Canadians are undertaking huge loan burdens. And this has given rise to apprehensions that these debtors would not be able to service their loans when the government finally hikes the interest rates.

In fact, the most up-to-date information received from the real estate segment only underlines the apprehensions regarding the possibility of a housing bubble in Canada. Data available from the Canadian Real Estate Association shows that the number of homes sold during January last was approximately 58 per cent more compared to the corresponding period in the previous year, when the market was at its lowest. What is more significant is that the average prices of homes sold during this January increased by 20 per cent to about $328,537. Regardless of the fact that there have been some developments, the country's financial system is still far away from what may be described as 'roaring' and joblessness persists to plague the economy obstinately.

It may be mentioned here that despite the fact that the Finance Minister Jim Flaherty had maintained just only in January last that he did not perceive any indication of a housing bubble building up in Canada, he was quick to change his mind and declare a number of measures to change the manner in which the real estate sector has been operating in Canada.

According to the new initiatives taken by the Government of Canada, the real estate sector will have to follow a number of new and uniform norms vis-à-vis mortgages with effect from April 19, 2010. However, the new measures does not incorporate anything that is likely to severely influence the people's financial power to acquire real estate during this spring, particularly for people who would be looking forward to buy their first home. In fact, all the changes that will be effective from April 19, 2010 pertain to the mortgages that are endorsed by government-promoted mortgage insurance firms - Crown Corporation and Canada Mortgage and Housing Corporation. It is compulsory for a home buyer to insure the mortgage on his or her property provided they make a down payment that is below 20 per cent of the property's appraised value.

The details of the new standardized norms that would become effective on all mortgages with effect from April 19, 2010 are as under:

  • In order to be eligible for a mortgage insurance, all new mortgagors will be required to fulfill the condition for a five-year, fixed-rate loan instead of a mere three-year loan. In fact, though the five-year rate is presently most accepted and widespread, the mortgagor will not be required to accept these stipulations. It is simply a check to ensure that the borrowers will still be able to take this sum of loan alongside gross income in the instance of the interest rates going up drastically. It may be mentioned here that the most suitable allowance is 43 per cent to be paid for housing costs from gross income of the mortgagor.
  • People intending to obtain fresh loans on their houses with a view to enhance their financial resources or do away with elevated cost credit card loan, will henceforth be able to borrow only a maximum of 90 per cent of the appraised value of their houses. Earlier, they were allowed to borrow as much as 95 per cent of the value of their homes.
  • People who would now purchase residential rental real estate not occupied by the owner simply as an investment venture will henceforth be required to settle 20 per cent of the price of the property. Earlier, they were required to settle only five per cent of the property's price.

Precisely speaking, these initiatives are aimed more at the discernment of action instead of a key credit clean-up. In fact, it is simply a means for the Canadian federal government to indicate its apprehensions and initiate a number of preventive steps with no intention of disrupting the real estate market in the country.

It is believed that at a maximum, the new initiatives announced by the Canadian Finance Minister Mr. Jim Flaherty is likely to remove a little of the fervor from the real estate market that has been witnessing fierce tender conflicts. Such biddings wars have been responsible for the steady rise in the costs of houses as well as condominiums.

Many are of the view that the prevailing scenario at the Canadian real estate market is the fallout of a slow but sure development that began sometime in July 2008. While the Canadian Finance Minister Mr. Flaherty still refutes that the possibility of a housing bubble building up in the country, the federal government had declared long time ago that the Canada Mortgage and Housing Corporation (CMHC) would be providing indemnity only to mortgages when the borrowers made a minimum of five per cent deposit before buying a house. This announcement of the federal government had actually witnessed the exclusion of loans taken without any making down payment. On such earlier occasions, mortgagors sometimes even borrowed to the extent of 103 per cent of the price of their house. However, it is another issue that expenses towards the transfer of ownership of the land and other related fees were then incorporated in the mortgage.

Simultaneously, the federal government at Ottawa also made it mandatory that henceforth all mortgages would only be amortized for a maximum period of 35 years, instead of the previous system of amortizing mortgages for 40 years. It has been known the Mr. Flaherty is optimistic of repealing the abrupt enhancement of the amortization period in 2006. It may be mentioned here that earlier the average amortization period for mortgages was much less - 25 years.

Despite the new initiatives, people like the former Bank of Canada governor Mr. David Dodge who have been openly expressing their apprehensions regarding the feasibility of the country's housing market at least since the last four years, do not feel that the measures are as strict as they had expected them to be. Nevertheless, this subject transports us to the political aspects of the entire issue.

Here, it needs to be underlined that assuming power through an election and sustaining the popularity of the government among the electorate are entirely different issues. In fact, the present government would be better off to sustain its popularity by continuing with an environment that is encouraging for purchasing new homes. Thus far, there is nothing from the federal government that assures the people (read electorate) that it is endeavoring to fulfill their dreams of living in homes owned by them!

At the same time, it needs to be mentioned that the traditional wisdom is to encourage home ownership, as it is beneficial for the health of the society as well as the country's financial system or economy. In fact, home owners are believed to be more established as well as politically occupied, as owing a home would likely to make them feel that they are active participants in their respective communities. In other words, this denotes that the home owners pay their taxes, participate in elections and are normally occupied with constructive things.

Apart from the above mentioned benefits of home ownership, owning a residential property also denotes that permanent and dependable personnel is always accessible for businesses. Other than this, people owning their homes are actually the shoppers who are spending all the time and the money they spend makes the gross domestic product (GDP) change directions. These are the people who continually spend money on purchasing furniture, appliances, renovating their houses and the like.

The issued discussed so far together with an extraordinarily flexible phase of wide-ranging financial success has actually resulted in a somewhat deep-seated array of anticipations regarding the housing sector. Throughout North America, there is little doubt that owning a home has now being considered as an absolute or unchallenged privilege.

It is important that the politicians as well as different government agencies, such as the Canada Mortgage and Housing Corporation (CMHC) along with others are responsible for promoting such basic knowledge regarding an individual's prerogatives. Hence, it is now important for them to ensure that they do not do anything that might cause any upset, particularly at a time when situations are already changing. As a result of this, Finance Minister Mr. Flaherty has taken on loan a page from the manuscript of the central banks and is basically endeavoring to allure the housing sector to relax instead of compelling the federal government to initiate ruthless measures.

As things stand now, let us look forward to the impact of the initiatives of Mr. Flaherty and expect that they yield the desired results. Or else, the Canadians would soon hear a thunderous bang that would signify that a housing bubble was not only present, but it has blown up.

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