I read a story in the Financial Times recently with a rather misleading headline, “Covered bonds: The European link to Canada’s house price boom.”
Europeans who have used covered bonds to invest in the Canadian residential mortgage market are doing well.
The article bears this out, but the headline would suggest investment in these bonds is somehow serving to drive Canada’s housing boom, which is flatly not the case.
As the article states, covered bonds are popular in European finance. Unlike with the subprime mortgage crisis that derailed the U.S. economy in 2008, covered bonds are considered quite safe.
Banks issue the bonds to investors to fund mortgage lending. The debt is then secured against the mortgages, providing bondholders with extra security in the event of a default.
Those of you interested in the nitty gritty of international banking might find this fascinating, but it really has no impact on the Canadian housing market.
Supply and demand trumps all
The only governors on the trajectory of our housing market are what they have always been – domestic demand and supply. Both are always changing. In the major markets, demand is driven by factors that include migration within Canada, immigration, employment growth, income growth, availability of financing and interest rates.
Financing apparently has been readily available for some time, and interest rates are still low. I just leased a new car and the total interest payable over the four-year term is just over $7, or about 15 cents per month.
Supply in growing markets is left up to the development community both for greenfield and infill housing. Statistics on housing starts suggest there are a lot of houses being built, notwithstanding the challenges faced by developers in getting approvals and the time it takes to move a project from initial planning to occupancy.
91 per cent of market activity
Housing starts data for 2016 data shows 91 per cent of Canada’s market activity is coming from Quebec, Ontario, Alberta and British Columbia.
I haven’t found the stats for all cities, but from CMHC data it looks like the Toronto Census Metropolitan Area (CMA) logged 37,000 starts last year, Vancouver 26,000 and Montreal 20,000.
These three CMAs account for about 43 per cent of the country’s total. Clearly, there is demand pressure in these areas, but equally evident is that the development community is providing supply.
Whether the supply is sufficient I don’t know.
Foreign buyer impact overstated?
Is European influence making lending cheaper or more available in Canada, thereby adding fuel to the housing market? There is no evidence that I have seen.
Money for a mortgage or any other big purchase hasn’t been hard to borrow in Canada for years. In fact, it remains quite the opposite.
Not even the mysterious and often-maligned foreign buyer is likely having that much of an impact. The Ontario government has trotted out that plan for a 15 per cent tax on non-resident buyers, but recent data raises doubts about whether there really is a problem in need of a fix.
According to the Ontario Real Estate Association (OREA), foreign buyers represent only about 4.7 per cent of the province’s residential market. If you look at CMHC data for foreign ownership of rental apartments, the number is much lower, both in Ontario and across the country.
As OREA CEO Tim Hudak said recently, we need to worry less about the supposed foreign influence on the domestic market and just focus on creating more supply of what he called the “missing middle” type homes, like townhouses and stacked flats.
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