We didn’t start the fire
It was always burning
Since the world’s been turning
We didn’t start the fire
No we didn’t light it
But we tried to fight it
Written in 1989, it’s still applicable today.
Maybe even more so.
The chords might be simple, and the riff might be too catchy to be thought of as anything “special,” but wasn’t this song a bit before it’s time?
Think about how complicated the world is in 2019. I have daily arguments with myself about a variety of subjects, none of these arguments getting me any closer to understanding life, society, culture, or world issues.
And yet the lyrics from Billy Joel’s 1989 smash-hit, “We Didn’t Start The Fire,” are still relevant. Many of the mysteries haven’t been solved, the problems unaddressed, and the names mentioned have been made even more famous (or infamous…) with passing time.
If somebody re-wrote We Didn’t Start The Fire in 2019, how do you think that would go? Oh, wow. The mind marvels at the mere thought!
My parallel to today’s topic might seem cheezy, but it’s apt.
I was reading about the Liberal government’s pending announcement, which has been a very poorly-kept secret, whereby they intend to making housing more affordable for millennials. This made me realize that the give-and-take with different political parties, and different bodies of government, have essentially resembled a struggle to both put out, and keep a fire, going.
The housing market here in Toronto was on fire for a long period of time, there’s no doubting that. The fire raged on for about three-times as long as the average upward market cycle, and it wasn’t until the Ontario government, led by the LIberals, doused the fire in April of 2017 that we began to see things change.
In the two years since, we’ve seen a mixed market, not only here in Toronto, but throughout the rest of the province, and across the country.
Different cities and provinces have seen both increases and decreases in property values, slow and busy periods, and many of the buyers and sellers in the market ended up with experiences that they did not expect. The once-predictable market has kept us on our toes ever since, and it’s likely due to the changes in political parties, and associated policies, that have both aimed and either slowing down or speeding up the market.
I have never seen a run-up like the first four months of 2017, but I have also never seen a speeding car hit a wall quite like what happened in the third week of April in that same year. The Liberal government approached a raging fire, doused it with water, and kept spraying the hose until the fire was out.
But now, along come the federal Liberals, about to dump kerosene on the smoldering ashes, and re-ignite the fire anew.
We discussed the idea of “What the government could or should do” to and for the real estate market, and it’s participants, last month. Many of the commenters said the government should do absolutely nothing, and others made suggestions ranging from altering the terms of the mortgage stress test, to increasing amortization, to changes to the RRSP withdrawal for first-time buyers.
Reports this week suggest that when the Liberal government tables their budget on March 19th, “housing affordability for millennials” will be one of the key components.
Opinions will be mixed, and I do believe there’s potential for this to backfire both politically and in terms of the effects on the market.
First and foremost, many will question this move from a political standpoint.
The reports are using the word “millennials” and not the term “first-time home buyers.” If this is truly the case, then I can see how many members of society will claim this is discriminatory.
“First-time home buyers” can be of any age. I have clients that are 37-years-old and 38-years-old respectively that have been renting for over a decade, who scrimped and saved for a down payment that they think is reasonable (ie. way more than most would put down), and who are finally ready to enter the market. One might argue that they are smarter and more responsible than another individual who was or still is willing to take on far more debt, and others might argue that they were stupid to miss out on a huge market run, even though the latter part is hindsight.
In any event, they are just on the outside of what most consider to be “millennials,” and yet they are first-time buyers.
For the federal government to implement legislation that would help today’s 25-year-olds enter the real estate market, but not my 37 and 38-year-old clients, is discriminatory.
It’s age discrimination.
And look, I’m the right-of-centre caveman who shouts at clouds, wondering why everybody is so sensitive about everything out there today, feeling that most news stories are much ado about nothing, but I’d be remiss if I didn’t point out how others might perceive this.
So does this not open the door to other types of favouritism and/or discrimination on the intersectional hierarchy?
What about sex? Gender? Race? Sexual orientation? Religion? Class? Or creed, if that’s even a word people use anymore?
Tell me I’m arguing for the sake of arguing, but I don’t know that you can open this door, walk through it as you see fit, and expect that when you close it, the door stays shut forever.
Then again, and here’s where I like arguing against myself, just to provide perspective, maybe the government’s role is to find the sectionalities of the population who need more help, and step in.
As it pertains to age, we know that there are all kinds of benefits for senior citizens (that term has now been changed to “people of advanced age”), so is it not reasonable to assume that if the government implements programs, benefits, and rules/regulations for people at one end of the age spectrum, that they can do so for the people at the other end?
I know many would argue that a 65-year-old has paid taxes for the better part of a half-century, and simply put, has earned the rights and privileges that he or she enjoys, especially when compared to a 22-year-old who wants to purchase a home.
But is this a fair argument?
I can argue both sides of this, and I will end up right back in the middle.
Millennials are the future of society. Do we take care of them, to help usher them forward, in the same way that we help seniors, as a reward for a job well done?
Now from a market standpoint, there are also arguments to be made both for and against new regulations.
If you’re cynical like me, you realize that these new regulations wouldn’t really be well-thought-out with a plan for the market response, but rather they serve as a vote-buying measure a mere seven months away from an election that is destined to come down to the wire.
So does the market need stimulation?
Do we really want to dump kerosene back on the fire that we just put out?
The “help” for millennials could come in many different forms, ranging from an increased withdrawal limit from RRSP’s, to a 30 or 35 year amortization period, to a less-stressful stress-test, although I sure hope they phrase it better than I just did.
Global News provided the following from RBC economist, Robert Hoque:
RBC economists warn that taking steps to stimulate demand and increase purchasing power may not have the desired effect.
“Our view is that, while these measures could be well intended, at the end of the day, they might become counterproductive,” explained senior RBC economist Robert Hoque.
“It might just stimulate the demand at the time when the supply has difficulty adjusting to that demand, so basic economics entails this is quite likely going to inflate prices and perpetuate the affordability issue.”
The Canadian Mortgage Housing Corporation (CMHC) said, and I know this is hard to believe, that every Canadian should be able to afford a home by 2020.
I know this is going to anger many of the readers and commenters, who have expressed outrage before about how much debt the CMHC stacks upon the backs of Canadians, and frankly I agree. This is pie in the sky nonsense:
“We believe that everyone in Canada deserves a home that they can afford and that meets their needs. We also believe that we are in the best position to make that happen,” Evan Siddall, the corporation’s president, writes in an opening message in the document. “We are single-minded in striving toward this goal and it will guide our work in the coming years.”
“Deserve.”
“Needs.”
Oh boy, that’s a topic for another day.
But all signs point to the government making affordability a major part of both the federal budget as well as the election platform, and we’re going to know in a week just how they intend to pull this off.
Think what you want about real estate, the housing market, affordability, the role of government, or the politics involved, but make sure you take a moment to reflect on the re-igniting of this massive real estate fire, and whether or not that makes sense.
Is this a do-over? A whoopsie?
The government took so many steps to cool the housing market, and now they’re looking to spark the very same market up again.
Why?
You have to ask yourself, why?
Is it about politics and vote-buying? Is it about fairness to Canadians, after cash and foreign-buyers were unaffected by previous measures, while Canadians took it on the chin? Is this a decision made after careful examination of potential outcomes in the real estate market through hundreds of cities across the country?
Why make the change, and why now?
I have one final thought, and perhaps I should have led with this, since the preceding would have made a lot more sense to many of you, but will these measures actually be geared toward millennials, or will they be geared toward the whole market, but with the hope that millennials experience more affordability as a result?
If it’s the latter, which I absolutely expect that it is, then perhaps I could have avoided the entire “discrimination” section, but that was also for effect, and to drive home a point.
The government can’t have it both ways. They can’t implement legislation for persons aged 18 to 29 and expect not to get push-back. But they also can’t implement legislation across-the-board, to the benefit of every person in the country, and then pander to millennials and say, “See, we did this specifically for you.”
So what is my expectation for the announcement?
I expect that the government will re-introduce the 30-year amortization for insured mortgages for first-time buyers.
I can’t see them doing anything for “millennials,” and I can’t see them re-introducing the 30-year amortization across the board either, since that would have major implications.
I can’t see them making changes to the mortgage stress-test, since that would be essentially admitting it was mistake to begin with. Can we really expect them to claim “success” for implementing a policy for 12-18 months? The spin-machine would have to be set to overdrive to pull that off.
Next week may prove me wrong, but I’ll stand by my prediction.
I certainly welcome your predictions as well, and thoughts on idea of policies only for millennials.
Paully
at 7:43 am
Anything that the Government does to make it easier for people to qualify and buy real estate increases demand and thus perversely makes real estate more expensive. The Government should stop trying to manipulate the market. Close up the CMHC and watch how quickly that real estate becomes more affordable for all!
Michelle
at 9:49 am
Great piece! I agree that any policy aimed at millennials will reek of a handout during an election campaign but it won’t matter because people are too afraid to vote anything but Liberal. The government needs to stay out of the real estate market and just let the market sort itself out. Their policies are knee-jerk reactions and usually go against the intended results of previous policies. They just keep interfering and enough is enough.
Derek
at 9:58 am
Imagine if OSFI then stepped in like a boss and required buyers to qualify based on an ability to afford payments on a maximum 25 year mortgage.
Jake
at 11:35 am
Exactly what I was thinking.
CMHC reintroduces 30 and 35-year amortizations and OSFI makes buyers qualify based on 25.
That would be hilarious. Like two kids fighting and trying to one-up each other.
Edwin
at 10:29 am
If the government does something for “millenials” and then cuts the age limit at 30 (excluding plenty of millenials over 30) it will be hilarious.
Chris
at 10:53 am
Exactly. Most definitions set the start of the generation around 1981. Making the oldest Millennials 38 this year.
Libertarian
at 11:09 am
I know it’s unlikely to happen, but the idea of changing RSP withdrawals is funny to me because millennials claim to be poor, but then claim that they have tens of thousands of dollars in an RSP that they want to use instead to buy a property. New statistics coming out confirm that young people are barely contributing to their RSP.
With the existence of the TFSA, the gov’t should get rid of the HBP entirely. As Paully points out, everything the gov’t does to help people just makes real estate more expensive.
Condodweller
at 1:02 pm
As I was reading the part about increasing the max HBP amount I was wondering if millennials, many of whom think RRSPs are evil, had enough RRSP savings to withdraw even the current limit. If I had to take an educated guess, I would say probably 90% who are looking to buy a home have less than the current limit, therefore, increasing it would make no difference at all.
The cynic in my thinks this may be the best way to be seen to be doing something, acquiring votes in the process, without actually affecting the market.
Izzy Bedibida
at 2:31 pm
I couldn’t agree more. On my last trip to The Netherlands, my brother was telling me of an initiative that the Dutch government promoted to make home ownership more affordable and prevalent.
One would essentially take out an interest only mortgage. The owner hat title on home, but made interest only payments on the mortgage. When the house was sold, the bank received back its principal, plus the interest the mortgage paid, while the mortgage may have kept any differences in the sale price assuming the market rose.
This helped to greatly reduce the monthly payments while freeing up disposable income so Amsterdam or Rotterdam would not be hollowed out after office hours, or the residents became ENDIES with not enough money for anything besides rent/mortgage payments.
Plus there was an interest deduction on income tax…not sure how it worked.
My brother was saying that this scheme was phased out as European banking regulations were homologised.
Might be a good scheme for expensive markets in the GTA or YVR, but I doubt that any government would implement something similar.
Housing Bear
at 3:25 pm
Maybe allowing people to refinance with interest only mortgages or 30 amorts would be a good idea to launch in the next recession to provide relief to struggling households (reduced payments) but at any other time is just magnifies financial risks. People will still max out their monthly carrying cost capabilities so it just results in higher total leverage. Furthermore, you are essentially renting the property from the bank the entire time you “own” it. Does not work well in retirement. Won’t have the same nest egg upon retirement. In a correction scenario people are much more likely to default. The US learnt this lesson the hard way 10 years ago. Australia who has a similar economy to ours, was in a similar position to us following the Financial Crisis, and who also had a crazy housing boom over the past decade allowed the interest only where we did not (at least with big regulated banks). Sydney and Melbourn are now in free fall and their central bank was not even able to raise their rates once.
Professional Shanker
at 12:27 pm
So with all that you have said, isn’t the only alternative for govt’s as opposed to increasing interest rates and causing mass defaults to allow further lending (increasing amortizations, lower interest rates)? To me it seems like the only alternative to keep the global monetary system from collapsing……CBs kept rates too low and this is their reality!
Also, not sure I agree with you on default risk as once you make a transitional switch from owning properties (paying down principal) to financing properties (interest only), banks look less at the LTV ratios and more at income ratios. Nobody including the banks owns anything everything is just financed from generation to generation.
My belief is that is where the global lending market will slowly transition to once the next recession in upon us. Perhaps I am wrong but if I am then we are in for a big reset (all assets not just RE) which no gov’t will want.
Housing Bear
at 11:16 am
Evan Siddal the CEO of CMHC, Carolyn Rogers the head of OSFI, even RBC have all come out recently to warn against removing B-20 or introducing new measures that would increase overall indebtedness……….. Will that stop the Liberals from making any changes? Absolutely not, they need a miracle right now.
I believe the libs strategy to keep the economy running as best as possible (pretty much all numbers have been horrendous recently) and to try and pander to the voting demographic that does no research and that cares more about feel good catch lines and social media conformity than the effectiveness or impact of policy. That’s why the following measures will all be for first time home buyers, though it will be wrapped in language to appeal to millennials. Ironically, it will be this same demographic that gets screwed the hardest when all is said and done.
I would say we definitely see the 30 yr amort. Don’t think they will touch B-20, would have to strong arm or replace the heads of OSFI (Too close and similar to JWR/ SNC) so extended amorts would be the most effective way of getting monthly payments down to increase total debt carrying capabilities. Higher total debt carrying capacity can support higher prices. Outside chance they would do 35yr. Could make some adjustment to RRSP withdraws but I don’t think this would be that effective because younger adults have not been using their RRSP as much as past generations. Instead, but a lower probability, we could see some sort of X# of year interest free government loans for first time home buyers.
This could cause a temporary spike in sales activity, perhaps even a bit of a price bump, but by the time SHTF for first time bag-holders the Libs will be in power for another 4 years.
Full disclosure, voted LIB in the last election cause Harper went full evangelical with his terrorist (muslim) snitch line (You never go full evangelical!), and I thought some new younger blood could be refreshing for Canada………… We all make mistakes. The SNC scandal may change things but unfortunately with Mad Max and Jagmeet odds are probably in favor the LIBS getting re elected.
Another David
at 11:46 am
This just re-affirm my decision to never vote for the liberals.
Trudeau need to be removed from office ASAP.
Jennifer
at 1:55 pm
Not sure what the feds can do. Affordability (e.g., the sale price) and access to more funds are two completely different issues. Access to more funds does nothing for affordability. It just lets you add on more debt, which is the last thing we need.
It’s not just an issue for millennials or first time home buyers. It’s also someone who wants to “upgrade” out of their starter home/condo. A 10% or 20% drop in the market, in absolute money which is how people operate, has a greater impact on price on the more expensive home. This might help that person move on out of their “starter” home, add supply to that category, and then first time home buyers may be able to enter the market easier.
They can outright ban foreign ownership unless you meet certain criteria or have a connection to Canada. But I believe that would be a provincial matter.
Housing Bear
at 3:55 pm
The problem is how “affordability” is defined and measured by industry folk and financial analysts vs what the public thinks it means. The former analyze and measure it by how much of a percentage of you monthly income goes towards your ownership costs. Thus you could have home prices down by 20% but affordability getting worse if rates go up by too much. In correction/recession scenarios banks get much tighter with who they will lend too and tend to add more of a risk premium to their loans to offset other loses. Affordability almost always continues to gets worse in the early to mid stages of the correction. Wages also tend to fall in recessions further reducing affordability. Conversely in a rising price/ falling interest rate environment it can still look like “affordability” is improving (payments going down and next buyer having similar monthly payments) despite the fact prices are rising……….. This was basically the situation in Canada since the mid 1990s. In the past few years people went absolutely crazy and maxed out their monthly payments at record low interest rates. Your right about why the industry wants to get rid of B-20 and/or extend amorts. They want the average wage monthly wage to support carrying higher total debt loads. “Affordability” will only start to increase once banks figure out a way to bring rates even closer to 0, or towards the end of a correction/recession when prices are down and banks are willing to lend cheaply again………………………….. unless you are a cash buyer that is.
Condodweller
at 12:37 am
The only way to help affordability is by higher wages or reducing demand. Minimum wage earners are not buying houses in Toronto therefore increasing the minimum wage is not helping affordability. Hight tech jobs coming to Toronto helps but unfortunately the reason they are coming here because labor is cheaper here than in the US therefore there isn’t much increase in wages to affect affordability. Even if there were, it would soak up supply with no effect on affordability. The only way to really reduce demand is by reducing/eliminating immigration but that’s a whole another cattle of fish.
I’m on record saying that if anything, I would like to see qualifying rates increased.
Ultimately, regulators just need to stay out of it and let the market sort it out.
Carl
at 2:27 pm
It’s a big country. There’s plenty of affordable housing across Canada, just not in Vancouver and Toronto.
Jimbo
at 3:04 pm
What if the election was in May or June??
30 Year amortization seems appropriate.
Mxyzptlk
at 8:23 pm
At least the Grits will probably introduce measures that don’t cost them (i.e. taxpayers) anything. The opposition parties, on the other hand, need have no such compunctions so you can bet they’ll trundle out their own (much costlier) plans, which they of course won’t implement should either party take power in October.
Clifford
at 8:31 pm
The constant meddling of the housing market is unfortunate. Ever since the government started realizing real estate was a cash cow for them, things went into overdrive. Affordability is a problem, for sure. But prices go up because costs of everything have gone up. Construction workers, home inspectors, electricians, etc costs have all gone up. Development costs have gone through the roof. The builder just passes that cost on to the buyer. So the government makes money that way. They also make money through various taxes at various stages of the real estate process.
Our government has gotten drunk off of land transfer taxes (2x in Toronto) and property taxes…they need to keep the bubble going because we NEED that money now.
Tax, tax, tax, tax, and more tax. That’s all our govrnment knows how to do. They really should stay out of the market. They have made a complete mess of things.
Increasing ammortization will not help affordability. home prices will just increase even more and we’ll be in the same situation again.
I don’t really know if there is an easy solution here. I do feel that OFSI killed the market with the stress test though. And not only just that, but the 2% qualifier was overkill. Now banks are lowering rates because people can’t qualify. LOL. But there were just too many changes that all came at the same time. Then we had Libs with the rent controls which were completely stupid.
Will be interesting to see what kind of promises the Libs throw out there to buy votes.
Argo
at 9:08 pm
Okay, sure, government policies and taxation are contributory factors but what does government have to do with the increasing “costs of everything … construction workers, home inspectors, electricians, etc. costs have all gone up”? These are primarily the results of market forces.
Jennifer
at 1:24 pm
They increased minimum wage by a large percentage overnight. That increased costs from the bottom up, no question. This was all over the news when it came out. So yes, government directly involved in higher costs.
Condodweller
at 12:44 am
It will be interesting to see what happens when preconstruction condo investors take possession over the next few years who bought at recent high prices. I suspect with rent control in place perhaps investor with cash-negative positions who weren’t planning on it and have no buffer built into their plans will start selling. This should reduce demand and increase supply but whether it will be sufficient to reduce prices is questionable. Some of the freed up supply will probably be taken up by those house buyers who can’t afford houses moving down the ladder to condos.
crazyegg
at 4:18 pm
Hi All,
Good day.
I was one of those idiots that bought got caught up and “bought high” – $485K. This was the most I have ever paid for any investment condo, ever and I struggle with buyers remorse constantly.
The occupancy date is at least 3 years off which will buy some breathing space. But who knows where the market will be then?
I am 100% hoping and praying for rents to cover my monthly costs and P+I.
Thankfully, with the way rents are skyrocketing and thanks to Dougie basically abolishing rent controls for new units, having at least a break even monthly cash flow may be a probable scenario,
Regards,
ed…
The silver lining is that
Bev
at 1:18 pm
Quess what will make what was an affordable home radically unaffordable for those who are long into fixed income land. A huge fee hike like the one An Ottawa condo building had of over one hundred per cent. Because no one not even the “professional building management engaged by the board saw the need for elevator replacement ?
Or the board didn’t know if it’s reserve fund was funded at baseline threshold statutory or full. And even then elected to tread lightly…(its reserve fund was underfunded by a factor of over five hundred per cent explaining the ramp up from 700 to 1500 dollars are month.) Of course there are quieter explosions of special assessment that don’t make the news. But this is a ticking time bomb in the land of affordable housing solutions for all age groups but especially seniors. And unlike the US there is not regular testing of a hodge podge of professional service reserve fund study providers….just cheap talk about affordable housing to buy votes