Housing industry leads way to economic recovery

As the year 2009 began, the new home building industry had a healthy internal debate as to whether to ask the federal government for a direct housing stimulus program. At the time, with the global economic crisis at its height, a case could certainly have been made for such stimulus yet the industry stuck to its principles and chose to ride out the storm without any direct support.

In hindsight, with the market recovering quite smartly as the year progressed, a housing stimulus program would have been wasteful and redundant. Frankly, the industry took matters into its own hands, stimulating the market by slashing costs and margins to the bone to shed inventory while redesigning new product to be much more affordable.

And so it was with some chagrin that I heard federal Finance Minister Jim Flaherty muse earlier this week about putting the brakes on the hot housing market by increasing the minimum down-payment and or reducing the maximum mortgage amortization. Let me get this straight  -- we don't ask for stimulus, we do a pretty good job of getting things rolling in the name of jobs and investment, and the moment things start to look up, we are asked to take a cold shower?

Flaherty is right to keep a close eye on the situation with mortgage insurance but that also means being careful not to over-react. Let's not forget that Flaherty took pre-emptive measures even before the global economic crisis hit. In July, 2008, he imposed a number of restrictions on mortgage insurers including a prohibition on insuring mortgages with amortizations longer than 35 years, a minimum five per cent down-payment, minimum credit score requirements, maximum debt ratios and new loan documentation standards, all good things as far as I'm concerned.

Flaherty is undoubtedly reacting to the rapid increase in house sales and prices brought about in part by ultra-low interest rates. With rates projected to stay close to current levels through 2010, housing markets have improved much faster than the overall economy, but not to the extent that Flaherty needs to throw a wet blanket over everything.

According to Dr. Peter Andersen, consulting economist to the Canadian Home Builders' Association, there is no valuation over-shooting to be found in the data on new home prices. He notes that in western Canada, most major cities are still showing significant year/year declines. Winnipeg and Regina as well as central and Atlantic Canada show relatively small year/year increases of one-two per cent. Only Quebec City is higher than two per cent.

"Looking more closely at Ontario, there is no sign of excessive new house price increases anywhere. October data show Toronto prices still down year/year," says Andersen.

"Proponents of a housing bubble choose to ignore such new house price data. They look at average resale prices, which tell a confusing story. While they were up year/year in November by 19 per cent, last November was a depressed month for pricing. Taking a broader look at 2009, average existing home prices are up by only 4.4 per cent from the same period a year earlier," Andersen adds.

It's hard enough for first-time buyers in the GTA to scrape together five per cent down so any increase in the minimum down-payment will be particularly discouraging. Tweaking the amortization period would be more palatable and responsible but I can't help but think that this whole discussion is premature. If anything, our Finance Minister should be delighted with the way the housing sector continues to produce jobs and support the economic recovery.