WHY THE FEDS WON'T RAISE INTEREST RATES

Let's face it. Interest rates have a lot to do with the cost of homes right now, in Toronto and most of the country. We live in the golden age of low interest rates. Ask anyone who owned a house in the 1980s, and they will not hesitate to remind you that interest rates were once in the double digits. This story will often be told as a cautionary tale warning today's homeowners that interest rates can rise again.

...And I'm sure they will some day. I doubt we will see double digits any time soon or a great number of people would lose their homes, and the economy would be in a whole lot of trouble. Not a great move by the government.

Still, I don't need to remind most people that these low interest rates have never been so low. Buyers often qualify for larger mortgages at a lower interest rates. Because of that, they are able to spend more money on a new property,  and there is more competition at higher price points.

Recently, the Federal government has been under some pressure to tame the stubbornly buoyant Toronto and Vancouver housing markets. If the markets in these cities won't cool themselves, then the Federal government believes it should step in and help, or as some people see it, interfere.

For many of the past five years, condos in Toronto and Vancouver used to be the housing villain. They were the poster boys of a housing market on the brink of a collapse. Constant fodder for real estate doomsayers and cranky anonymous blog commenters. They were apparently in oversupply and at risk of taking the Canadian economy south - and I don't mean for a nice winter vacation.

These days, condos don't seem to be the bad guys any more. They have had reasonable gains in Toronto and Vancouver. The new villains seem to be detached houses that have been on a tear for the past decade often rising in the double digits each year. Right now, the average detached Toronto home is at roughly a million dollars. In Vancouver, it is closer to $1.6 million. So, we're not seeing a lot of starter homes here.

Some see this as a new reality in these cities, which have become international cities, and for better or for worse, have had much more investment from overseas that may have contributed to the higher prices, particularly in Vancouver.

An easy way for governments to control the housing market would be to raise interest rates. Of course, interest rates are not just here to influence the housing sector, but the entire Canadian economy. So, the government has to take into account if a higher interest rate would positively influence the oil sector, or the manufacturing sector or exports in general. There is a lot to consider beside the real estate market.  With oil prices falling, the government may be inclined to lower interest rates again, even into negative territory, to prop up the economy.

Also, the housing market is not exactly performing the same all over the country. In fact, property prices are dropping in Calgary and Edmonton, and flatlining in many other cities. So, an interest rate hike may send prices even further down in these cities adding stress to an already lacklustre or faltering local economy.

Yes, it appears that the rising home prices and high cost of living in Toronto and Vancouver have led to a dilemma for the Federal Government. Raising interest rates to tame the markets in Toronto and Vancouver would certainly not benefit the country as a whole.

Of course, that doesn't stop the government from creating other obstacles for buyers in an attempt to tame the wild beasts of Toronto and Vancouver. Right now, they are considering raising the minimum down payment on insured mortgages from 5% to 10 %. Personally, I don't think this will change much in the Toronto and Vancouver markets, but at least the government could say they are doing something.

Some other countries like New Zealand are going much further to contain their runaway real estate prices. Their government has proposed a 30% minimum down payment only for the city of Aukland and only on properties that are investments. The New Zealand governor who has forwarded this idea states; ""The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market."

It's an interesting idea. Instead of focusing on the country as a whole, New Zealand is proposing tougher mortgage qualifications for one major city, not the entire country. Furthermore, it only targets investors. Unlike Canada, New Zealand keeps track of overseas investors, and according to their statistics, there are many overseas investors who buy up properties in Auckland because it is a stable economy and sound investment. Unfortunately, this means more competition and higher prices.  So, the government is trying to target investors, domestic and foreign alike, to keep prices more reasonable.

I'm not saying I agree with such a proposal or that the government should get involved with the housing market, but I do think there is something smart here. It may be wise to create policies specific to certain cities or local economies. Real estate at a national level is very hard to navigate. One policy could possibly tame the property process for boom towns while really causing damages in more vulnerable markets.

Can the Government Be Blamed for Toronto's High Housing Prices?

By now, many real estate professionals and enthusiasts have given us their two cents about the Perth Street property that received 32 offers and went for $208,725 over asking last week. It seems that we just can’t resist that "real estate gone wild" headline. Works every time. But why the huge offer over the asking price? Well, some real estate salespersons and watchers claim this Perth Street house was listed well under the market value. If the price was selected based on the sales of comparable homes in the neighbourhood, the difference between list price and the sale price may not have been so headline worthy. Still, there is no ignoring that 32 buyers have tried to buy this one house, and this lead to one solid fact: there are not enough houses for sale.

Part of this is seasonal. January does not usually bring a lot of new listings, but this low inventory of houses has been a chronic Toronto problem for quite awhile. So, the question becomes: Why are there so few houses available for sale in Toronto?

This is where I like to blame the government. Don't get me wrong. They're not all bad. They can take some credit for regulating the banks in a way the United States never did, avoiding a mortgage meltdown and a real estate crisis, and they have put in some policies that prevent people, who are not ready to buy property, from a costly mistake. Still, let's not get too smug in our Canadian ways because government policies often leads to the situation that Toronto is currently in with no houses to buy, but more buyers in a price range under one million. So, let's look how the buyers grew and the sellers shank in numbers due to government policies.

MORE BUYERS. Not too long ago, the Canadian government said the mortgage insurer, CHMC, would no longer insure properties over a million. It made sense. CHMC was taking on a lot of mortgage debt on behalf of Canadians and the government wanted to lighten their debt load. In Toronto, houses can easily exceed a million in many upper middle class neighbourhoods like Little Italy, Riverdale or High Park. Even if you think those neighbourhoods are too fancy for you, let me remind you that emerging neighbourhoods like Leslieville and the Junction can easily have homes reach the million dollar mark. And even then, you may be saying "I have no intention of buying a million dollar house. So, this doesn`t effect me." The truth is, this policy affects you too. 

Out of the buyers who want to buy a home worth a million dollars or more, some of them will not have the required 20% down to buy it. So, for those who cannot cover the 20%, they will be competing with everyone else who wants to buy a house under a million. At the end of the day, this makes the houses under a million more a lot more competitive.

LESS SELLERS. It's been a number of years now that the city of Toronto has begun asking for a land transfer tax when someone who lives in Toronto buys a property. Buyers used to only pay the Ontario land transfer tax until the city of Toronto needed more money. I understand that the city of Toronto needs a revenue source, but by creating a land transfer tax, the local government almost doubles what a buyer would pay in taxes if he or she bought a property. The municipal government has put a huge burden on those who want to sell their properties. Many first time buyers get a bit of a break on the land transfer tax. So, the burden is not as big for those buying for the first time around.

 If you sell, there's a good chance you'll purchase another property, whether it's a bigger place for your expanding needs or a smaller more manageable place. You'll still need the pay big dollars when you buy again. For example, a reasonable move-up house at $850,000 would mean $13,475 in Ontario Land Transfer Tax and $12,725 for Toronto Land Transfer Tax for a combined total of $26,200. That's a lot of money to hand over in addition to the cost of selling and moving and future renos. The result has been that people would rather stay put and not sell their home. Thus, we see the situations where there are less homes for sale.

I don't want to blame the government for everything, and I don't always disagree with some regulation of the real estate market. There are a lot of reasons why houses are becoming more and more expensive. They don't build many houses any more in Toronto. People want to live in the city again. The commute to the suburbs is too painful. I can go on. Still, whatever the reason you see, I'd say two things are clear to me. The government has created policies to cause house prices to rise, and this year, in most Toronto neighbourhoods, house prices will continue to rise because of limited listings hitting the market.