Mortgage hike and housing slump is no disaster

By Michael Taube Last Updated: July 21, 2010 12:02pm

GTA resale home transactions for June were down 23% from last year’s level — no surprise, as the real estate market has been saturated with overpriced homes, high volume of sales, and a wide variety of houses available for purchase for some time.

Toronto had to go through a real estate correction — not only because this is the way the market works, but also because asking (and final sale) home prices were out of whack, to put it mildly.

With housing rates falling, some people are concerned mortgage rates will start to rapidly increase — with Tuesday’s quarter-point hike being just the start.

The thinking is banks will need to hike 1-5 year mortgages to make up for the shortfall in sales. This will lead to more home defaults and foreclosures, reduce investor confidence, and create a drain on our economy — just like what happened in the U.S.

That’s what some people think. I’m not one of them.

I believe mortgage rates will gradually increase over the next year or two, but not as high as some fear.

Long-term mortgage rates (three years and up) follow the bond market. If bond yields are high, banks will usually spike mortgage rates to make up for funding costs. If bond yields remain low, mortgage rates also remain low.

Meanwhile, the correction in a real estate market does not mean market collapse. A repeat of the U.S. mortgage meltdown won’t happen here.

The subprime mortgage crisis was, in former U.S. Federal Reserve chairman Alan Greenspan’s view, “an accident waiting to happen.”

He’s right. It was a preventable accident. High-risk loans given to people with lousy credit was a bubble waiting to burst.

The late department store tycoon Marshall Field had a simple motto, “Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”

That’s what happened in the U.S. While we blame “greedy” businessmen, “arrogant” government officials, or “dim-witted” low-income families for this financial mess, everyone had their fingers in the pie — and enjoyed the filling a bit too much.

In Canada, we don’t offer subprime mortgages to potential clients. Most importantly, credit checks matter.

If you don’t have sufficient personal income or assets, you ain’t getting the deed to the house.

As well, the Canadian economy continues to chug along. According to Statistics Canada, 93,000 new jobs were created in June, and most jobs lost during the recession have now been recovered. As long as our economy remains on track, real estate will not collapse in Toronto.

It’s up to federal politicians — and, to a lesser extent, provincial and municipal politicians — to ensure economic growth remains a priority so the real estate correction doesn’t become a real estate collapse.

But it’s also up to voters. If pro-business and pro-development forces are in charge of our political futures, the economy should remain on solid footing, bond yields should remain low, and mortgage rates should remain stable.

If not, the future of real estate in our fair city could be up in the air.

— Taube is a former speechwriter for PM Stephen Harper. His family has been involved in mortgages for more than 50 years