Canada’s housing market is cooling down, which is a good thing, according to Fitch Ratings.
The global rating agency said that the cool-down will help stabilize Canada’s banking system, thereby ensuring prolonged economic growth.
In other words, what’s good for the goose is good for the gander.
“The latest sales numbers provide some initial evidence that risks of near-term overheating in the Canadian housing market may be subsiding,” the agency said. “This could be a positive development for Canadian financial institutions as long as the labour market remains relatively stable.”
And therein lies the rub. Fitch’s forecast is predicated on the labor market remaining stable, but Capital Economics estimates that 115,000 construction jobs alone will be lost due to the cool-down.
So why has Finance Minister Jim Flaherty been working so hard for just this kind of outcome? Flaherty has been very insistent on cooling down the market, and analysts agree that his tightening of mortgage rules helped lead the market to its current position.
Well, it’s a simple matter of short-term vs. long-term strategy. While the cooling market may sting like a wound washed with rubbing alcohol, the temporary discomfort will prevent the wound from getting infected and leading to limbs falling off.
In case that analogy was too gross or confusing, Flaherty is essentially doubling down on the idea that whatever negative economic consequences arise from a cooling market pale in comparison to the damage a bursting housing bubble can do.
The American economy was ravaged by its housing market crash, and Flaherty has been warning against a similar fate for quite some time.
After Flaherty’s home loan restrictions took effect in July to offset ultra-low mortgage rates, home sales decreased by 5.8 percent the following month. Analysts expect the trend to continue.
“While prices may be holding up, there is now widespread evidence that home sales tumbled in almost every major city last month (save Calgary),” said Douglas Porter, economist for Bank of Montreal. “Our monitoring points to a national decline in sales of 15 percent year-over-year, with average prices at best holding flat.”
None of this is particularly good news for the housing market, but if Flaherty is correct, the cool-down will allow financial institutions time to secure themselves and concentrate on the real problem: Credit risks posed by homeowners swimming in mortgage debt.
The stronger the banks, along with fewer people being weighed down by mortgage debt, the greater the chances for economic growth, or so goes conventional wisdom.
Many borrowers and lenders may resent being babied by Flaherty and his economic policies, but without someone to remind us to eat our vegetables every now and then, how many of us would end up subsisting on candy and soda?
Maybe eventually we can find a happy medium.