It’s no wonder economics is nicknamed “the dismal science.” Often, economists report statistics with little context, and commentary; leaving people to wonder what exactly this may mean for them. This is particularly true regarding the impact the news has on local communities, especially those outside the major urban centers. I’m an Economist and Wealth Advisor who has migrated back from Bay Street, Toronto to Main Street, Hamilton (my hometown). This column is an effort to eliminate the often dismal view of economic reporting, while adding some local perspective. I will be looking at the numbers and assessing how they apply to the economy in the Western Golden Horseshoe area. I will also try to provide context and practical information to those who live in this region.
For example, you may have heard the recent announcement that the real estate market in Canada is cooling off. While that may be true in Toronto and other parts of Canada, the story is quite different in places like Hamilton and Burlington. In fact, there is some evidence to suggest that the real estate bubble has merely been squeezed to cities outside the major urban areas. Recent numbers from the REALTORS Association of Hamilton-Burlington show a significant increase in some markets outside the GTA, especially in Burlington where average residential prices were up 15% year-over-year in March 2013.
The Federal Finance Minister, Jim Flaherty, has a history of interjecting in the real estate market, but it’s unclear whether his actions are providing a net benefit to Canadians. In 2012, Mr. Flaherty capped the mortgage amortization period to 25 years for borrowers with less than 20 percent down payments, but it’s interesting to note that he also approved zero down, 40-year mortgages back in May 2006. Additionally, this spring Minster Flaherty took the rather bold step of personally calling major financial institutions, including BMO Bank of Montreal and Manulife, to express his displeasure with mortgages rates which he felt were too low. The banks responded by eliminating the low rates. In reality, the banks were simply less public in advertising the fact that these rates were still available. It is hard for many Canadians, including economists, to see how increasing rates will help prudent borrowers get out of debt faster.
Despite the Minister’s best effort to manage the real estate market, there is still danger. The truth is that lenders are still enormously anxious to lend you as much money as possible, for as long as possible. Banks are happy to grant you a loan for an expensive house, even if it means you’ll have a mortgage payment well into your golden years. In contrast, it’s difficult to get banks to pay us money, even the paltry interest our cash is entitled to from doing responsible things, like saving for a child’s education, or squirreling money away for a future retirement.
Government regulation should always strive for one thing: balance. However, the onus will always be on the individual to achieve that balance. This may sound a bit preachy, but it is up to us to resist the constant allure of a better house in order to achieve the other important financial responsibilities in life.
So when the lust of a renovation or a bigger house overwhelms you, be aware that the Western end of Lake Ontario may be showing signs of a real estate bubble. Don’t let it rob you of the resources needed to do all the other things you want to do, like send the kids to school, expand the business, or maybe, just maybe, retire with enough money without having to immediately sell that great house.
Paul Carvalho is President, Chief Economist and Wealth Advisor with Reeves Private Wealth. He has spent 15 years in finance with a global custodian bank, a major investment firm and a Canadian Chartered Bank.