Low rates stoke housing bubble
Peter Foster, National Post · Jun. 4, 2011 | Last Updated: Jun. 4, 2011 4:14 AM ET
Should Canadians be more concerned with inflated real estate prices or inflated real estate brokerage fees? This question springs to mind because of two aspects of Ottawa's current involvement with Canadian housing. On the one hand, the Competition Bureau is claiming to stand on guard for Canadians by breaking the real estate brokerage cartel and its 5% commissions. On the other, despite some marginal tightening of mortgage rules over the past 18 months, and repeated stern warnings from Mark Carney and Jim Flaherty not to use your home as an ATM, their artificially low interest rate policy is still promoting overheating.
According to a report in Friday's Post, the Office of the Superintendant of Financial Institutions is looking into the impact of foreign investment on Canadian real estate -which has reportedly been a factor in Vancouver, and recently featured a $28-million condo purchase in Toronto. However, any foreign investment impact is dwarfed by the influence of government policy.
Messrs. Flaherty and Carney claim that they have no choice but to hold rates down as long as the United States is still attempting -unsuccessfully -to flood the market with money. Otherwise the loonie might be goosed to uncompetitive levels. However, the irony is that U.S. interest rates are being held down to counter the consequences of a Washington-stoked, Wall Street-facilitated housing bubble. Unfortunately, but perhaps inevitably, this seems to be reflating everything but U.S. house prices.
Benjamin Tal, deputy chief economist at CIBC World Markets, was quoted in the Post this week as suggesting that: "Ironically, the misery of homeowners in the United States is actually benefiting homeowners in Canada." We should be wary of such "benefits." While the Canadian market never saw the insanities of U.S. subprime mortgages, and does not suffer from the continuing shadow of overbuilding and foreclosures, the desire of U.S. policymakers to compensate for their real estate mess may indirectly be stoking a mess -albeit of less epic proportions -here.
There is an almost startling difference between the state of housing markets north and south of the 49th parallel. The latest Standard & Poor's/Case-Shiller housing survey showed that U.S. home prices fell 4.2% in the first quarter, extending the fall in house prices to eight months. By contrast, the latest Canadian figures suggest that while the volume of sales was down in the early months of this year, average prices in April were 8% up on last year. The average price of a house in Canada in April was $372,544, more than $100,000 above the U.S. figure.
For the moment, therefore, those thinking of buying or selling should perhaps be more concerned about the future of price levels than commission rates, although the latter are certainly also an issue.
Last week, the Competition Bureau launched a suit against the Toronto Real Estate Board at the Competition Tribunal for trying to squash competitive innovation. It claimed that TREB was preventing the flow of information from its Multiple Listing Service, MLS, to potential buyers via so-called "virtual office websites," VOWs, which would enable buyers to cruise relevant market details on the Internet.
This action follows a fight last year by the bureau with the Canadian Real Estate Association forcing CREA to allow its members (real estate boards such as TREB) to post flat-fee listings on the MLS for sellers who do not want the full hand-holding service package.
The Competition Bureau case against TREB raises the issue of why a buyer would need intense hand-holding, either, when relevant material could easily be made available online. Certainly, both real estate information and brokerage services are valuable. The problem is that they are overpriced. The evidence lies in the surplus of agents.
Bill Johnston, the president of TREB, reacted with outrage to the Competition Bureau's further assault on his members' ethics and livelihoods. He lashed out at bureau head Melanie Aitken for alleged "curveballs," "low blows," "career building" and "bad faith." He claimed that TREB was well on the way to rolling out its VOW strategy. Ms. Aitken, by contrast, suggested that TREB was dragging its feet.
One can understand TREB's reluctance to get with the innovation program. Although VOWs would be operated by TREB members, once you let prospective buyers start letting their fingers do the walking, everybody might start asking more questions about why those commission rates are still so high. Still, sending a complaint to the Competition Tribunal hardly guarantees a speedy resolution of the issue, which could drag on for years.
Consumer protection is usually misguided or ineffective. Adam Smith pointed out that tradesmen might be inclined to conspire, but solving this problem was best left to competition. Real estate brokerage is unusual in that it seems to be a successful long-term "conspiracy." CREA and its real estate boards have a tight grip on market information, which they obtain from sellers and hoard for their own benefit.
However, we can rarely rely on government to "protect" us. It is worth remembering that the Competition Bureau announced a "victory" over the real estate industry in 1988. Meanwhile, any good that this piece of consumer protection may achieve could be swamped by the impact of government policy elsewhere. While the Competition Bureau purports to protect the Canadian consumer, other parts of the Ottawa octopus, by encouraging home purcPublish Posthase via statebacked mortgage insurance and artificially low interest rates, are a much bigger threat to her welfare.
