NCPA - National Center for Policy Analysis

Mortgage Rules Won't Lower Prices

July 19, 2012

There is considerable concern about rising house prices in Canada. Some fear a housing bubble like the one that decimated the U.S. housing market. And this for good reason: prices appear to be rising at a rate that cannot be checked by even the most powerful of policy instruments, says Wendell Cox, an adjunct scholar with the National Center for Policy Analysis.

  • Total household debt has reached new heights at 152 percent of discretionary income.
  • Other than Hong Kong, the 8th Annual Demographia International Housing Affordability Survey shows Vancouver to be the most unaffordable of 325 metropolitan areas.
  • Vancouver's house prices are more than 10 times household incomes, far higher than the historic norm of three.
  • Toronto's house prices have risen to more than 75 percent above the norm, while Montreal's prices are 70 percent higher.

In response to this growing concern, Ottawa has announced tightened lending rules, reducing maximum loan terms from 30 years to 25 years, and maximum loan amounts from 85 to 80 percent of house values for mortgages insured by the Canada Mortgage and Housing Corporation (CMHC).

However, these policy changes are unlikely to have a substantial impact because they fail to address the source of the problem. While lending practice reforms seek to damped demand for housing, the origin of skyrocketing prices stems from a lack of supply encouraged by provincial and municipal land-use restrictions with catchy labels such as "smart growth" and "growth management."

  • In some of the country's largest metropolitan areas, it has become virtually illegal to build detached housing on or beyond the urban fringe.
  • Given that more than 80 percent of Canadians live in urban areas, these restrictions pose substantial hurdles for those seeking to purchase a home.
  • Further, by significantly constricting the supply of available housing, smart-growth policies artificially drive up prices, lending momentum to the current rise that public policies seek to address.

Thus, the tools available to CMHC and the Bank of Canada have little potential to contain house price increases. While this is a significant matter of national economic concern, the solution can only begin with action at the provincial, regional and city level with the loosening of zone restriction standards.

Source: Wendell Cox, "Mortgage Rules Won't Lower Prices," Vancouver Sun, July 5, 2012.


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