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Dale Jackson

Personal Finance Columnist, Payback Time


There’s an ancient banking proverb that goes something like: “If a customer can’t pay his debt, he has a problem. If several customers can’t pay their debts, the bank has a problem.”

There’s little doubt that proverb is echoing in Canada’s banking corridors these days as the housing market hits a fever pitch; prompting concerns from several economists that some residential real estate markets are in a bubble.

Rock bottom mortgage rates and pent up demand from the COVID lockdown are fueling frenzied price growth. The average February selling price in the Greater Toronto Area jumped nearly 15 per cent from the previous year to a record $1,045,488 as sales surged more than 50 per cent. Sales in Vancouver were almost 43 per cent above the 10-year average in February as the benchmark price topped one million dollars. 

The bubble concerns focus on the possibility of mass default if interest rates rise rapidly. That would be a problem for banks and the entire economy, but it is the banks - from your local branch to the Bank of Canada in Ottawa - that have the power to deflate any bubbles in the housing sector.

Although mortgage rates are set by individual banks, the trend setting interest rate is set by the Bank of Canada. It can use the benchmark rate and several other monetary tools as levers to cool an overheated economy or heat up a cold economy. To wit: In the aftermath of the 2008 global financial meltdown and last year’s economic lockdown, the central bank kept rates low while it injected cheap money into the economy to keep credit flowing.

With all that debt sloshing around it’s hard to believe the Bank of Canada has any intention of raising the benchmark rate. It has already taken the rare measure of publicly signaling that rates will remain low for a long time. Last week, a top Bank of Canada official mentioned rising home prices aren’t going unnoticed, but did not indicate that any action is in the works at the central bank beyond being on watch for risks to the financial system.    

And then there are the banks themselves, which have the ability to control housing risk on the front lines. Through proper screening and stress tests they can prevent individuals who might not be able to pay their mortgages from becoming large groups that can’t pay their mortgages.

While some of the economists warning of a bubble represent the big banks, the body that regulates them - The Office of the Superintendent of Financial Institutions (OSFI) - has not expressed a need for an additional clampdown (at least not yet). Even the Federal government, which has tightened mortgage rules in the past, hasn’t rushed intervention. 

For many wannabe homeowners and those looking to move up the housing ladder the level of risk depends on their personal situation. Anyone taking on a new mortgage should get their bank to do an informal stress test based on their ability to make regular payments in a rising interest rate environment: have the bank run scenarios of what mortgage payments would be if rates went up one, two, or three per cent and determine if budgets could withstand that pressure.

One thing to keep in mind; there are troubles with bubbles. The housing bubble concerns focus on big city markets like Toronto and Vancouver, and don’t apply to the vast majority of Canada.

Bubbles also imply prices are out of whack with intrinsic values as we’ve seen in cryptocurrencies, cannabis stocks and some technology stocks. Even if a housing correction occurs and prices dip for one or two years, long-term homeowners will be able to weather it out with a roof over their heads. The real housing risk lies with speculators and flippers.      

Finally, we’ve been hearing about housing bubbles since at least 2008. It’s possible many potential homeowners who were frightened off since then have been priced out of the market.

Those who are in the market are enjoying record low mortgage rates. More of their regular payments are going toward building equity and owning their homes free and clear.