Housing Slowdown: Good or Bad?

Housing Slowdown: Good or Bad?

[blockleft]”Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust” – Jim Flaherty[/blockleft] We are all aware of the new mortgage rules that came into effect July of this year. Yesterday, for the first time, Canada’s finance minister Jim Flaherty has publicly taken credit for the effects the new rules have had on the housing market, and he is very pleased with the results. The purpose of the new mortgage rules was to pull the country away from the alleged impending burst of the housing bubble, and to curb a US-style housing crash. The housing slowdown, the drop in sales and resales, and falling home prices, are all good things, according to our finance minister – or at least the lesser of two evils, as a housing slowdown is better than a market crash.

The new mortgage rules created a drop in demand, and as the basic laws of economics teach us, a drop in demand with stable supply creates a drop in prices.

Another goal of the new mortgage rules was to lower Canadian household debt. Typically as a method of controlling household debt governments raise interest rates to increase the cost of borrowing, however due to the global economy’s recent recession such a move could have created some adverse effects, most notable of which could have been a nation-wide economic slowdown. Instead, tighter mortgage regulations were put in place with the some goal reached. It was a bold move, but was it the right move?

Well, the Financial Post is reporting that growth in credit has been slowing in recent months. It is stated also that Canadian household debt is at a record high, so it appears that the message is getting through to Canadians and the new mortgage rules are having an effect on consumer spending and lending.

Where this trend is definitely not taken very lightly is in the real estate market. With the new mortgage regulations real estate agents are feeling the squeeze, and the feeling is shared by builders as well. The tougher it is to find financing for a new home, the tougher it is to sell and the riskier it is to build. This actually creates a series of other effects: if building slows down, jobs may be lost, and the economy could start to slow.

What will happen only time will tell. Jim Flaherty maintains a positive outlook for the year to come, so let’s hope Jim’s right!

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