Scotiabank CEO calls on Ottawa to raise down payment rules again

Friday Jun 03rd, 2016

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Brian Porter argues the federal government must intervene further if it hopes to slow the rapid rise of real estate prices in Canada’s two hottest housing markets. The chief executive of Bank of Nova Scotia told BNN he is “a little concerned” about price activity in Vancouver and “maybe pockets” in Toronto, where the average price of a home has surged 41 per cent and 45 per cent respectively over the past five years, according to the Canadian Real Estate Association. Higher down payment requirements appear to have made little difference since they took effect in February, but Porter believes that remains Ottawa’s best option. “I think there are some levers the government could use and it would be prudent to do so,” Porter said. “The main lever is down payments, so maybe you want to escalate the down payment higher and we would be in favour of that.” Despite new requirements for homebuyers to put down at least 10 per cent of a home’s purchase price above $500,000 – in addition to the pre-existing five per cent minimum down payment for any amount below that threshold – the Vancouver and Toronto real estate markets are continuing to defy gravity. The average Toronto home price (including condos, townhomes and single-family homes) increased nearly 12 per cent in April to $614,700; while in Vancouver the year-over-year price growth topped 25 per cent to settle at $844,800. “It is not sustainable and I don’t think it is healthy, there is a bit of an aberration here,” Porter said. “I know OSFI [Office of the Superintendent of Financial Institutions] is concerned about it, the CMHC [Canada Mortgage and Housing Corporation] is concerned about it, the Department of Finance is concerned about it… so I think there [are] more things the government can do.” In addition to raising down payment requirements, Porter suggests Ottawa may want to look at how the industry “adjudicates the five-year fixed mortgage, so maybe you raise the artificial rate on the five-year fixed mortgage.” Many have pointed to an influx of foreign buyers, particularly from China, as one of the main drivers of such dramatic price growth. Benjamin Tal, deputy chief economist with CIBC Capital Markets, recently suggested imposing a “flipping tax” on foreign buyers who purchase Canadian real estate only to sell for a quick profit. Canadian provincial and federal governments have held off on any attempts to curb inflows of foreign cash into the Vancouver and Toronto housing markets in large part due to a lack of verified data on the actual significance of the trend. Compounding that problem, Porter said, is the opaqueness of the Chinese economy itself. “In terms of the Chinese economy… it is a bit of a black box and I think anybody would tell you that,” Porter said. “I cannot tell you how money flows are going to come out of China in the next quarter or the quarter after that.” The rise in home prices has forced Canadians to go deeper and deeper into debt in order to access the accelerating market. Household debt hit yet another record high in the final quarter of 2015, with the ratio of debt to disposable income averaging 165.4 per cent; meaning the average Canadian held $1.65 in debt for every dollar they made in disposable income last year. “People use the term ‘record debt load’ but they are not looking at the other side of the balance sheet so I’d caveat that a bit,” Porter said, noting average Canadian asset levels were also increasing as their home values rose. “The Canadian consumer is in pretty good shape.”

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