This week, Typhoon Harvey offered another little lesson in market forces. It’s a tutoring that helps us think about Canadian real estate.
Call theory tells us that people who wanted to protect their worth from the hurricanes and floods that plague the Gulf Coast should entertain had insurance.
The fact is, only about 20 per cent in the Houston acreage did, says Robert Hunter, an insurance expert with a U.S. consumer investigating group.
“All these people taken out in boats, they have a flash problem: They have no insurance,” he said.
Stock Exchange theory also tells us that, like Texas homeowners, Canadians taking into the current housing market understand the risks they are fetching.
If interest rates rise, they know they will from to find more cash to pay their monthly mortgage payments. The option is they will lose their homes.
The example from Hurricane Harvey pickets the difficult choice for the Office of the Superintendent of Financial Institutions, or OSFI, the Canadian regulator that has infatuated the lead in trying to take the froth out of Canada’s housing market.
Free statements from Canada’s biggest banks show they from come around to the idea that a market free-for-all may be dangerous for already overheated homes. Bank of Montreal chief economist Doug Porter has announced that Toronto was a foam, and we’ve popped it.
OSFI isn’t so sure. It has floated additional rule changes that could go into effect later this year.
This week, a describe from TD Economics chief economist Beata Caranci gives a experienced stamp of approval to OSFI attempts to cool the market.
TD: Soft touchdown
As the title of the report, Navigating a Soft Landing, implies, TD expects the growing layers of rules imposed by various levels of government to calm but not explode the market.
Not everyone in the Canadian real estate industry has been so accepting.
As CBC turn up last month, some in the property business, including Grant Thomas, stagger and partner with The Mortgage Group, would be happy for the government to kibitz out.
“The government has been intrusive in our industry in the last three years, and they extend to be so at a rate that is probably unnecessary,” he said. “I’m not overjoyed whenever the direction involves itself in business.”
For OSFI, the complication appears to be that parts of the industry, anxious to keep the boom quick, are working their way around the regulator’s first attempt to discipline the furnish.
Under the initial rules that kicked in last October, anyone who craving to borrow more than 80 per cent of the purchase price of a home ground — in other words, those with a down payment of less than 20 per cent — wish have to prove they could afford an increase in borrowing set someone backs of two percentage points, a so-called stress test.
Those people, with what’s termed a high ratio mortgage, must also buy mortgage insurance that minds their lender if the borrower defaults.
But there was more evidence this week that the first off stress test is not working. A report from the Canada Mortgage and Casing Corporation out yesterday shows the number of insured mortgages is declining bolster the rule changes in October.
Dialect mayhap people with low down payments are putting off buying a house, but there are indicators something else is happening.
Rather than paying the mortgage indemnification and submitting to the stress test, some borrowers are topping up their down payments with allowances from unregulated lenders.
Such lenders include mortgage investment corporations that eat traditionally offered second mortgages. Or they can be the bank of mom and dad.
That’s why OSFI now dearths to restrict official deals between regulated and unregulated lenders, summoned “bundling.” The regulator also wants to apply the two per cent stress check up on to borrowers who ostensibly have more than a 20 per cent down payment.
In Houston it occurs many homeowners were willing to take a risk on losing all things rather than buy expensive insurance. In Canada, the pressure to buy a dream retreat in an overheated market means some buyers are willing to squeeze every penny out of their money managements without leaving a pad to protect themselves from rising rates.
It may be that affair rates will never rise. Before Harvey, perhaps it was plausible for homeowners to assume Houston would never flood. Now there are dismays houses will be abandoned and parts of Houston will never take a turn for the better.
In the Canadian case, a continued property boom followed by a sharp come to nothing as pinched homeowners run for the exit could crack Canada’s economic retaking.
The free market analysis would say they take the risk, they pay the evaluate. But when disaster strikes, it’s not just the individuals who take the risk that suffer.
On Don on Twitter @don_pittis
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