Canada's Housing Bubble

Feb 12, 2010 Financial Post

Savings could attract new buyers: economists

Easier access to the Multiple Listing Service could add new fuel to Canada's overheated housing market, Scotia Economics said in a research note Thursday.

The lower commissions could offset changes reportedly being considered by the federal government to toughen mortgage qualification policies, said the note, written by economists Derek Holt and Karen Cordes.

"Indeed, the potential is there for home-buying conditions to actually become easier over the next one to two years via sharply lower average commission rates that are more in keeping with choices south of the border," the note said.

Holt and Cordes argue that the savings from reduced real-estate commissions could be substantial, and could make up a large part of the difference on a down payment if it is changed from a five-per-cent minimum to a 10-per-cent minimum.

For example, a typical five-per-cent commission paid against the average resale price of $345,000 would result in a commission of $17,250. The same home sold at rates offered by the still-tiny discount-broker segment would result in a commission of $1,500, a difference of $15,750.

"Thus, through the interplay between potential shifts in mortgage rules and the Competition Bureau's challenge, Ottawa is likely to at worst leave buying incentives on neutral terms, or could even instead drive more stimulative terms, given a low probability of changes to mortgages rules.

"The Bank of Canada cannot rely on the regulatory apparatus to cool what we think is a house price bubble," Holt and Cordes warned.

However, Edmonton Real Estate Board president Larry Westergard said he's having a hard time seeing a real estate bubble here.

"We've not had that big an increase in prices this year, just the normal Edmonton three or four per cent."

On Wednesday, the Canadian Real Estate Association announced it would ask its members to bow to pressure from the Competition Bureau of Canada to allow easier and possibly cheaper access to the Multiple Listing Service.

While the Conservative government in Ottawa has denied the country is in the midst of a housing bubble, numerous commentators have voiced concern about the possibility, as resale prices reach record levels and new-home prices continue to rebound sharply, as reported Thursday by Statistics Canada.

On Wednesday, former Bank of Canada governor David Dodge added his voice to the debate, warning that prices have reached a point where they are almost unsustainable.

And last month, Moody's rating service joined Bank of Canada governor Mark Carney in warning about rising consumer-debt levels, which, the rating agency said, were being driven largely by the housing market. According to Moody's, the trend could leave Canada in a worse position than the United States in the next few years if it continues.

"We believe the housing market is the principal driver of this expansion," said the report by Peter Routledge, senior vice-president at the rating agency.

"We have the uneasy sense that we have seen this movie before. ... As witnessed in the United States, this movie does not end well."

Finance Minister Jim Flaherty has raised the possibility of tightening mortgage requirements. Some of the solutions being floated include doubling minimum down payments to 10 per cent or reducing the maximum amortization period to 30 from 35 years.

"There are certain tools available to the government if we choose to use some of them or all of them," Flaherty said in an interview during the G7 finance minister meeting last weekend in Iqaluit.

"Right now there is no compelling evidence of a housing bubble in Canada."