Ottawa introduces new measures to cool the housing market

While our provincial leaders continue to sit on the fence, Ottawa is taking measures to cool the housing market by introducing two imminent changes: the capital gains exemption on the sale of a primary residence will apply only to residents of Canada, and additional insured mortgages will have to be stress-tested to ensure borrowers can still afford them even if their incomes dip or interest rates rise.

The first measure is aimed at preventing investors from buying up Canadian real estate and then flipping it for quick profits; the second at keeping those Canadians who can afford to buy a home from losing it should circumstances change.

Mortgages insured by the banks with portfolio insurance will soon have to meet the same criteria that applies now only to highly leveraged insured mortgages; rather than applying only to fixed interest mortgages with terms of less than five years and variable-rate mortgages, the “stress test” will apply to all insured mortgages.

Finance Minister Bill Morneau made the announcements Monday, pointing to the emergence of an attitude shift with regard to the way unprecedentedly low interest rates in particular have made us look at debt, which he says has led to “pockets of risk” emerging.

Following the federal announcements, Ontario’s housing minister Chris Ballard continued to stall, calling the efforts “interesting.” At the Ontario legislature, he said that although Ontario leaders are “very concerned” about affordable housing in the province, the province “really doesn’t have, and the federal government really doesn’t have, the data that we need to make the best decisions.” While he said he’d love to see some solutions come to the table, he has been lacking in much insight himself.

A tax on foreign investment (or even a vacancy tax) seems like a no-brainer, even if there’s little data available. It doesn’t affect the Canadian residents our government should be trying to protect.

I expect the former will have an appreciable impact, but the latter not so much. In the wake of regulatory changes, CHBA CEO Kevin Lee said he didn’t expect the measures to have a significant impact on “traditional” homebuying. The chief economist at the Conference Board of Canada said the number of Canadians who won’t qualify under the new mortgage regulations is “extremely small.”

Developers and real estate groups continue to point to a lack of developable land as the culprit;  Urban Development Institute CEO and president Ann McMullin said following the announcement that taxation is not the key to affordable housing, and she urged government to increase supply.

As I noted last week, intensification (which takes a shift in attitude) may be a better solution than opening up the Green Belt, which the Toronto Star this week rightly called an “irreversible mistake.” One should never apply permanent solutions to temporary problems.

The Green Belt protects agricultural land while reducing the appeal of urban sprawl. Although proponents say sprawl creates growth for local economies, detractors say it creates traffic jams, displaces wildlife, increases tax burdens for residents as new infrastructure is required, and even increases car dependency, which is a drain on resources and, research suggests, contributes to health problems like obesity and high blood pressure.

So, has the time come to let go of the dream of a half-acre lawn?