OTTAWA – Canada’s finance minister is taking credit for the recent cooling in the hot housing market, saying a slowdown now is better than a crash later.
Jim Flaherty was reacting to the sudden loss of momentum in the Canadian economy and the role housing, with the sector contracting 3.5 per cent annualized in the third quarter, is playing.
The government moved for the fourth time in as many years to tighten mortgage availability in July, resulting in a sharp reduction in housing activity, resales and even lower prices in some markets.
“The housing market has softened somewhat in part because of steps that I’ve taken and I’m happy about that,” he said.
“Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust. So I’m all for a soft landing.”
Flaherty and Bank of Canada governor Mark Carney have been warning Canadians for more that two years they were taking on too much debt, particularly in real estate. But with the economic growth at low ebb, Carney was unable to slow down the market with interest rate hikes without impacting the economy as a whole.
That left the policy brake in the hands of Ottawa, and in late spring Flaherty announced government insured mortgages would have their amortization periods cut to 25 years from 30. The impact was to raise the cost of monthly payments on a typical $350,000 mortgage with three per cent interest by $184. The move also reduces the amount a homeowner pays in interest over the life of a mortgage.
CIBC economists Benjamin Tal said Flaherty’s latest move, which went into effect in July, was the only one of the four that was done at a time the housing market was already showing signs of cooling.
That speeded up the decline, Tal said, adding he does not believe the correction is over. He expects house prices will drop about 10 per cent on average over the next year.
“(Still) I do agree it was necessary,” he said. “It’s good to slow housing when you want to slow it, as opposed to having it slow because interest rates rise or there’s another recession.
“(The correction) is not insignificant, but it’s not going to push us into a U.S.-style crash,” he added.
Flaherty said he is also pleased that Canadians appear to have heeded the message about getting their finances on a more sound basis.
Canadian households now hold about 162 per cent more debt than their disposable annual income, a record level. But the growth in credit has been slowing in recent months.
“When it comes to consumer debt, I am encouraged by the reaction of Canadians. More Canadians are paying down their mortgages, more Canadians are paying their credit cards on time. This is very desirable,” he said.
With housing acting as an unexpected drag, Statistics Canada reported Friday that growth braked to a meagre 0.6 per cent in the third quarter this year, the third consecutive quarterly decline of the year.
Flaherty said he was not overly concerned about the disappointing third-quarter result, saying he believes the momentum loss is temporary.
“It’s a time in which we are going to be buffeted, there’s going to some months better than others, but overall we will be OK with modest growth next year,” he predicted.
“We are on track … for modest growth, moderate growth, in the next fiscal year.”
Economists do expect a economic rebound in the current fourth quarter of 2012, blaming part of the third quarter’s losses to temporary shutdowns in the oil patch, but still say the economy will remain weak.