Canada moves to pop its property bubble

Go Canada. From Garth Turner:

Death by politician. Who would have thought the very governments that (more than anything) helped create gaseous housing markets would be its executioners?

But here we go.

Just four days ago the feds assaulted real estate with such verve it’s taken this pathetic blog three whole days to detail the blood-&-guts specifics. New tax threats on principal residences. Stress tests for moisters. A crisis for mortgage brokers. Tumbling stocks of lenders. No insurance for rentals or entrepreneurs or 30-year borrowers. It’s a long, tough list.

And that came on top of the shocking 15% Chinese Dudes tax slapped on all Vancouver transactions at the end of July. As that market was already in distress, this had an immediate impact. Recent sales charts for August and September resemble Kim Kardashian’s bottom (or so I’m told).

Now the word’s out that Ontario will be following suit, with an announcement scheduled for after the long weekend. The Chinese Dudes Tax, GTA Edition, will also be at 15% (at least that’s the number being put before preem Kathleen Wynne), which would add $195,000 to the cost of the average detached home in 416. Ouch. Already Toronto has double land transfer tax, which glues an additional $44,200 to the price of a $1.3 million beater house.

Yep, government tolls, levies and taxes are outta control. Now there’s more.

The City of Vancouver will be launching a vacancy tax in the new year, hiring an army of bylaw rent-a-cops to snoop around and see who’s actually sleeping in the properties they legitimately bought and own. If the city deems yours to be vacant for an unacceptable period of time then, zap, you’re taxed. Now West Vancouver is going a step further. The city across the water is a week or two away from asking the province for the right to goose its property tax on anyone (Canadian or not) who owns a home there, lives there, but has a principal residence elsewhere.

Yep, that’s right. Two-tier citizenship. And what will the rate be? “High enough to be meaningful,” a local political potentate says.

Hey, there’s more.

A largely-forgotten hunk of the changes dumped on the marketplace on Monday will forever change how Canadians are loaned money, and at what rate. Money minister Wild Bill Morneau has finally pulled the trigger on mortgage insurance, and started a process that will see taxpayers shouldering a lot less risk for that $1.4 trillion mountain of outstanding home loan debt.

Until now CMHC has absorbed it all (along with private sector Genworth) since every high-ratio mortgage in the land (where the borrower has less than 20% equity) must have insurance protecting the lender from default. Borrowers pay for this. The lenders get the protection. The government backs it all. This is called moral hazard.

It means a moister with 5% down that she borrowed from Mom, with no actual savings or, like, money can borrow hundreds of thousands at exactly the same rate as her parents who have a 70% down payment, substantial liquid assets and ten times the income. Since CMHC (and the taxpayers) has wiped away the downside for the bank, it adds no risk premium to any loan. You know the result – a housing bubble based on copious, epic, awesomely orgiastic amounts of borrowing.

Anyway, it’s history. Or soon will be. The bet is by this time next year lenders will be forced to have skin in the game by financing deductibles on all these mortgages they make. That risk-sharing won’t come cheap. Bankers will go from having almost no liability to billions of dollars’ worth, and you can pretty much count on mortgage rates going up in general, and rising specifically for those borrowers who have a higher chance of blowing up.

Morneau’s department made a point this week of saying our system of mortgage insurance, and of totally insulating lenders from risk, is “unique in the world.” The goal, he said, is to “require mortgage lenders to manage a portion of loan losses on insured mortgages that default, rather than transferring virtually all the risk onto the taxpayer via the government guarantee for mortgage insurers.”

In the end, this could be the greatest housing market decimator of all.

I might emigrate.

Houses and Holes
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  1. Two novel concepts there:
    -housing primarily regarded as shelter for local residents
    -bankers and banks assuming the risk for their lending decisions

    • It’s a Gartherism(™) – it refers to a section of young people with more hormones than brains who inevitably succumb to their bodily urges and make financial decisions they may will live to regret.

  2. TailorTrashMEMBER

    Love his writing style …….pity he did not attach that sales chart that looks like the Kardashian girls bottom …….man ! that is one down ass curve …….
    …………and yes that looks like a government that might think that homes for policemen ,nurses and firemen so they can shelter their children and ” help them get ahead ” is good for a society and a nation ……….now ,Malcolm and Scomo ……..what are your plans again ??

  3. Morneau’s department made a point this week of saying our system of mortgage insurance, and of totally insulating lenders from risk, is “unique in the world.”

    Not quite the only one in the world.

  4. We also need a vacancy tax. If a property is not a main residence on tax return or if it doesn’t have a bond on it lodged with VCAT (or equivalent). It attracts 1.5% tax on the value of the property p.a. If you only have it part vacant in the year, pro rata the tax based on the number of days vacant.

    • Vacancy taxes sound great until the practicalities of them hit home. Paying inspectors to knock on doors to check on occupancy is the absurd conclusion.
      A well designed land tax renders a vacancy tax pointless. And if somebody wants to purchase to keep empty then so what? They are consuming fewer of the services that are capitalised into the property, but still paying for the mortgage and/or the holding costs – rates, insurance and state land tax.

      • Paying inspectors to knock on doors to check on occupancy is the absurd conclusion.
        I’d suggest charging everyone a high land tax. Then the “inspectors” walk around handing out tax discount vouchers when people answer the door.

  5. Garth Turner is a longtime shortage-denier who for many years denied that Chinese buying was affecting the housing market.
    The smug prick thought it was a simple bubble caused by credit soon to pop, no need for govt action.
    Has he finally woken up?

    • No, he still denies the impact of the Chinese because there aren’t many of them. Clearly doesn’t understand what a marginal buyer is. He is funny though.

  6. Short supply, bad infrastructure blamed for Canada housing bubble | Reuters

    By Andrea Hopkins | OTTAWA

    A shortage of land for development and inadequate infrastructure are fueling the massive spike in Canada’s house prices and may undercut the government’s efforts to stabilize the market, according to developers and realtors.

    Supply is especially acute in the frothiest markets of Toronto and Vancouver, where strict greenbelt rules and limited transit beyond protected land hamper development.

    While Canada has plenty of land and not that many people, most of its 36 million population lives along the U.S. border, and 81 percent live in an urban area. … read more via hyperlink above …


    Working families and the middle class are becoming an increasingly endangered species in many parts of United States. Median household income remains below its 1999 peak (inflation adjusted). But the problem is not just stagnant incomes. Expenses are also rising, especially the costs of housing in some cities. As a result, it is becoming more and more difficult to make ends meet. … read more via hyperlink above …

    (access above link for information on New Zealand political progress)

  7. What about the silly Canadian policy of allowing people to use their retirement/super fund to buy a house.