How Disastrous Would a Housing Crash Be For Mississauga?

If there's one question that's been consistently asked over and over since at least 2008, is this one:

Is Canada's housing market about to crash?

While no one can predict the future and a massive crash still seems unlikely, the fact remains a startling number of homeowners (particularly young ones) are over-leveraged at a time where housing prices are sitting at record heights, interest rates are low and wages are relatively stagnant.

For that reason, the International Monetary Fund (IMF) is warning Canada that its economy could be in serious trouble should its hot-hot-hot housing market suffer a serious correction.

In its annual review of the Canadian economy, the IMF noted that while personal consumption has been strong in the country, "business investment remains weak, non-energy exports have underperformed, and housing market imbalances have risen."

To no one's surprise, the IMF pointed out problems other major financial groups and institutions have been fretting about for years—high housing prices and very high levels of household debt.

According to the IMF, Canada's $1.5 trillion mortgage market has helped sustain consumer spending, but has left more than a few households grappling with massive mortgages—especially in Toronto (and the overall GTA) and Vancouver. The housing market has also, as many Mississauga residents no doubt know, alienated prospective first-time buyers who can't afford to purchase $400,000+ one-bedroom condos, let alone $1 million detached houses.

To compound the issue, credit ratings of Canada's six largest banks were lowered recently, "reflecting concern that high household debt and the rapid appreciation of house prices could weaken asset quality in the future."

Housing issues are—and have been for some time—top of mind for all levels of government. The CMHC has steadily tightened lending practices, while the provincial government has moved to implement a 15 per cent foreign buyer's tax to help cool speculative investing.

The City of Mississauga is working on its own housing solution in cooperation with the Region of Peel, the province and the federal government—something that's imperative at a time when one in three households are spending 30 per cent or more of their income on housing costs.

But while there is some evidence that indicates the housing market is cooling off, prices remain high and Mississauga residents—and Canadians in general—are throwing significant portions of their take home pay at their homes, leaving many with little left over.

Should something prompt a crash or correction, many people's sole valuable asset and investment would be dramatically imperiled.

So, what is the IMF advising?

That the Canadian government do its best to tighten macroprudential and tax-based measures to limit or control speculative and investment activity.

"Tackling housing market imbalances should be a joint responsibility of both the federal and provincial authorities given the regional divide in housing imbalances," the report reads. "A further tightening of macroprudential and tax-based measures to mitigate speculative and investment activity should be considered."

Interestingly enough, the IMF does not support the foreign buyer's taxes as they are, pointing out—as multiple real estate organizations, including the Toronto Real Estate Board, have done—that foreign purchasers are not the sole drivers of the price increases.

"…Non-resident activity is not the sole driver of housing prices, as residents also contributed to the spike in prices," the IMF writes. "The authorities are encouraged to replace the tax with alternative measures that are effective to address systemic financial risk. This could include a combination of prudential and tax-based measures that discourage speculative activity without discriminating between residents and non-residents."

All in all, it appears the IMF is encouraging the Canadian government to do its best to mitigate the issue of homeowners overleveraging themselves.

"In this regard, greater coordination between federal and provincial regulators, as well as government efforts to collect more comprehensive data on real estate transactions and improve the availability of beneficial ownership information, would improve surveillance and the calibration of these measures," the report reads. "The macroprudential measures would complement safety nets that are already in place to safeguard the financial system, including strengthened supervision, a resilient banking system, full recourse loans, and government-backed mortgage insurance."

Perhaps the government needs to do more to understand the housing market and what's driving prices upwards before making major policy changes.

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