Stephen Harper is playing a dangerous game by declaring war on the Vancouver housing sector

The latestnumbers from the Real Estate Board of Greater Vancouver could have far-reaching political implications.

The REGVB has reported that July sales were the lowest in this month since 2000.

May and June sales volumes were also at decade lows. And if this continues, it will create a great deal of pain for real-estate agents and developers, who make their living by closing deals.

Lenders also expect to be repaid for financing projects, but it's hard to collect if the borrowers aren't generating sufficient revenue.

And that's where the politics comes into play.

The Conservative government has repeatedly reduced the mortgage-amortization period, dropping it from 40 years to 35 years to 30 years, and finally, to 25 years.

Many potential first-time buyers, in particular, have trouble affording a home in Greater Vancouver when they have to repay their loans within 25 years.

Senior bankers have been cheering on Finance Minister Jim Flaherty, supposedly because they are worried about a housing bubble.

The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate.

That's because the investment side of the financial-services business generates fatter profits—most of the time—than boring retail banking and those unglamourous mortgages.

In addition, chartered banks are not competing with credit unions to nearly the same degree on the investment side in comparison to the mortgage market.

So by shortening the amortization period to 25 years, Flaherty is, in effect, shifting financial resources away from real estate and into paper assets.

If the housing slowdown continues, don't be surprised if we start hearing about financial troubles in the credit-union sector.

That's not Flaherty's concern because credit unions are regulated by the provinces.

So any bailouts would come from provincial taxpayers and provincial credit union deposit insurance corporations.

Is a Zambian-born economist the cause?

I wouldn't be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.

In 2011, former Goldman Sachs investment banker Dambisa Moyo wrote a book called How the West Was Lost: Fifty Years of Economic Folly—and the Stark Choices Ahead.

In this book, Moyo zeroed in on how too much investment capital in the western industrialized world has been allocated to real estate, undermining economic competitiveness and enabling China to race forward.

"If you're going to have a bubble, the 'best' type of bubble is a productive asset bubble financed by capital markets," she wrote. "The technology boom of 1995 to 2000 is an example of that."

She claimed that the worst kind of bubble are in unproductive assets that are financed by banks.

"Japan's real estate bubble between 1986 and 1990 is one such example," Moyo noted.

Her previous book, Dead Aid, called for an end to foreign aid in Africa. Since it was published, the Harper government has sharply reduced assistance to the continent.

Similarly, Moyo's analysis of housing markets in the west could easily have influenced Harper to put the brakes on mortgage lending in Canada.

There's a disproportionately negative effect in Vancouver because this city has had the highest housing prices in the country.

Moyo has received a fair amount of attention in Canada, appearing on CBC and speaking in different venues. She was even invited to the Bon Mot Book Club in Vancouver, which was created by Leah Costello, a former director of events at the Fraser Institute.

Fans of the Fraser Institute tend to love Moyo's free-market view of the world. She has even claimed that the U.S. is on the verge of socialism.

The political implications of Harper embracing her ideas are pretty clear. People who work in the real-estate sector are some of the Conservative party's strongest supporters.

At the same time, the Conservatives appear to be implementing the ideas of an economist who opposes investments in the housing market.

If the federal Liberals are paying attention, they'll wake up to this and try to peel away some of the Conservative base. What that will mean to Harper's political future is anyone's guess—but it's probably not good if the next election comes after housing markets have crashed in cities across the country.


Follow Charlie Smith on Twitter at twitter.com/csmithstraight.

Comments (65) Add New Comment
Chris B
Interesting piece. I don't know... Sounds like a cooler Vancouver market would allow the younger set a chance to live a little closer to the action. And shifting investment into the markets... wouldn't that help boost growth and help seniors hoping to retire on their RRSPs? Don't care much for Harper, but this recipe sounds not so bad.
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db
not a lot of logic in this article - it's a thinly-veiled political piece...
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Alby
Let me get this straight....banks want the government to slow real estate investment so "money"...can flow ..." into the equity markets"? You know the government backs mortgages with less than a 20% down payment right? And that 70% of Canadians are home owners, right? Banks have a wicked deal, enabled by Harper (who do you think increased amortization from 25-40 years in the first place?). What they are worried about is a collapse....and the inability of home owers to pay their credit cards, loans and lines of credit. Harper is trying to prevent a collapse...but he's too late. Vancouver has misallocated money to a dangerous degree (what, exactly, are our "industries" anyway?) and will pay a heavy price. Real estate will return to its traditional path of (very) slow appreciation, and the "investors" can return to their natural home - the stock market.
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M---
It was the Harper government that boosted housing in the first place-- in 2006, they loosened the mortgage regulations, allowing 0% down payments and 40-year amortizations (down from the previous 25-year, 10%). Harper's just undoing his own screwed up economic policies.
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Wha???
Is this for real..!? I hear Harper was influenced by an Icelandic water nymph that has been known to whisper policy advice in his ear while he's sleeping... A very influential nymph. I'm surprised you didn't reference this possibility, Mr. Smith. By the way, the Vancouver housing market has already created significant hardship. The sooner and faster it falls back to normal levels, the better for all.
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Justin Flontek
Declaring war on Canadians is nothing new for harpo and Cons.
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Grey Goose
Funny how the Straight pretends to be the voice of the little guy, then runs an opinion piece like this as soon the author's unearned housing "wealth" starts to evaporate. He's no different than the corporate money-for-nothing fat cats he loves to hate. Champagne Socialism at its finest.
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Charlie Smith
Grey Goose,
You're assuming I own real estate. You should do your homework before making this type of assumption.

Charlie Smith
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KWL
I think Charlie must be a bit worried about future advertising revenue from developers given the amount of space it takes up in his paper. It looks more like a real estate weekly rather than a culture, arts, and entertainment weekly.

A market crash will be bad for those that bought in at the top but they were warned. Just exactly how will lower housing prices be bad for those who will be purchasing homes in the next 5-10 years?
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SKS
Written by an self-centered boomer who has to rely on his house value to sustain his retirement after he piddled away the proceeds of the best 30 years of economic growth with ever lowering interest rates....

Meanwhile, the following generations get to experience continued economic volatility, rising costs of living with deflating asset prices, and ever rising interest rates. Unlike your boomer generation that had the economic winds to your back, this generation gets to sail straight into economic headwinds...

If you every want your kids to live anywhere near you, you would want the market to cool and decline. Too bad you never diversified your assets and put all your eggs into the real estate basket. You are about to wake up to a new reality very soon with the demise of this unsustainable, ridiculous house bubble...
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Andrew
Wow, this is an incredibly misguided article. Yeah, returning mortgage rates to their previous sane levels, and trying to deflate the already massive Vancouver housing bubble is "declaring war on Vancouver housing". Every bubble eventually bursts, and larger it is the worse the burst. If they don't deflate it now, it'll be even worse in the future.
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Charlie Smith
SKS,

Read my message to Grey Goose. You assume I own real estate. What are you basing this assumption on? How do you know I'm not a tenant? And if I told you that I don't own real estate, would it change your views in any way? I'm guessing the answer is "no".

And what evidence is there that I have children?

I will tell you this—it's probably the most incorrect comment that's ever been directed my way on this site. And I've received a lot of blasts over the years.

If credit unions end up shuttering their doors in this province, perhaps you'll say to yourself, "Hey, maybe that guy was right after all."

Charlie Smith
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Jonathan
"By the way, the Vancouver housing market has already created significant hardship. The sooner and faster it falls back to normal levels, the better for all."

I couldn't agree with this comment more. I'm shocked to read the most conservative and reactionary article I've yet seen on Vancouver's bubble bursting in the Georgia Straight of all places.
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Many Franks
Mr. Smith, this is some particularly threadbare journalism. You write about the new mortgage rules as though they were a dangerous right-wing experiment when in fact they are a return to long-term trends. 30- and then 40-year amortizations were bought in by this Conservative government and bear considerable responsibility for Vancouver's unprecedentedly out-of-whack housing prices.

You seem to be blaming the bubble's existence on the manner in which it will burst. We do clearly have a bubble and it will burst. Meanwhile it's wreaking havoc on Vancouver's ability to retain creatives, families, and increasingly even high-earning professionals. It has a profound negative effect on quality of life here.

I am just starting a family. Currently I rent here in Vancouver as it's the only fiscally sane option. Returning mortgage rules to responsible levels makes it far more likely that one day I'll be a first-time buyer.
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R Gill
This article is lacking a lot of logic. Is this a joke link from the Onion?

1. 40 year amortizations did not make it easier to afford housing in Vancouver. In fact, quite the opposite. What it the amortization 9in conjunction with post 9/11 and post 2008 crash interest rates) did do was massively increase the amount of debt a large number of homebuyers had to carry. Instead of looking at the total debt, many simply looked at the monthly payment. That's what credit card companies bank on when they accentuate the minimum monthly payment;

2. What the hell does the fact that an economist was born in Zambia have to do with anything?! Can you further expand on the specious argument Charles Smith?;

3. Housing affordibility is off the charts in Vancouver and completely out of whack with economic fundamentals (i.e. local income; economic growth; inflation; etc). Is it a coincidence that this bubble (and it is a bubble that needs to be popped as all bubbles should be) came about when mortgage rules and interest rates changed substantially? And Smith thinks moving away from this out of whack model is a bad thing?

Seriously, is this a joke?
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moloko
declaring war on housing sector? ....that's a bit extreme

They did the right thing by reducing amortizations, unfortunately they were too late doing it.

I'm sure a lot of realtors will suffer, and I hope for their sake that they socked away the easy money from the last 10 years, but this is a good thing for the majority of Canadians.
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moloko
"I am just starting a family. Currently I rent here in Vancouver as it's the only fiscally sane option. Returning mortgage rules to responsible levels makes it far more likely that one day I'll be a first-time buyer"

now that makes sense! these changes are going to make it easier for first time buyers, just have a bit of patience
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anonymouse1962
Long term real estate returns are in the 5-7% range. All trends revert to the mean. So what should we expect after fourteen years of 12% returns?
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R Tupper
Is this a joke?

CMHC went wild only after Harper appointed his own choices to the board (circa 2004/2005?), and it's all taxpayers contributing a subsidy/socializing the losses if, or rather when, all these mega mortgages don't get paid on time. CMHC bonds are 100% guaranteed by the government of Canada, and as such they should be counted as part of the national debt

If there is no underpricing of risk happening, then there is no reason for the CMHC to have a guarantee as there are currently tens of trillions of dollars waiting to be lent for any kind of return (excess central bank reserves, tax dodgers who can lend but not spend from their tax havens)

If it is a subsidy, it should be plain and out in the open on the table -- who gets paid and why
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Joe Mainlander
When you see articles like this you wish old Mayor Tom 'Terrific" Campell had the police beat these old Straight hippies alot more... since they were going to grow up to be the boomer a-holes they became anyway.
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