Why the federal budget said nothing about mortgages

The housing market has become a hot potato no one wants to touch

Steve Helber/AP Photo

When it comes to the housing market, Jim Flaherty has made it clear that he would rather leave it all up to the proverbial invisible hand. A week before he introduced the federal budget last Thursday he poignantly told reporters he’d “quite frankly” like the market to “correct itself.”

No surprise, then, that the Harper government’s Economic Action Plan 2012 (yes, that’s what they like to call it) said precious little about mortgages–just a vague vow to increase oversight of the Canada Mortgage and Housing Corporation to promote “the stability of the financial system.” Hardly the tough clampdwon on ballooning mortgages that some in the housing industry initially feared the budget would contain.

Flaherty’s approach reinforces the impression that Canada’s housing market has become a hot potato no one wants to touch–and everyone would like someone else to cool off.

The big banks certainly don’t want to do anything about it–they say the government should. Most of them are offering record low 2.99-per-cent fixed-rate mortgages, and calling on Flaherty to cap government insurance on mortgages or shorten the maximum amortization rate from 30 years down to 25. Bank of Montreal chief Bill Downe and Toronto-Dominion Bank CEO Ed Clark have both been calling on the finance minister to–and I paraphrase here–”please stop us before we drive ourselves into the ground.” Their argument sounds somewhat like this: “We can’t help but continue to offer mind-boggling low rates to any Joe Blow who wants to buy a house he can’t really afford, or we’d lose out to the competition–unless the government steps in and tightens the rules of the game for everybody.”

Flaherty, for his part, has been throwing the hot potato right back to them. ”We have bank executives in Canada saying ‘You know, really the rules on insured mortgages should be tightened up.’ They must forget that they are actually the ones that issue the mortgages–it’s their market, it’s not my market,” he retorted.

The other guy who could try to pull the brakes on the housing market is Bank of Canada governor Mark Carney, but he ain’t going near it either. The governor has repeatedly voiced concern about the dire straits of Canadians’ personal wallets, whose main source of strain is housing debt. But he doesn’t seem inclined to raise interest rates above the current one-per-cent benchmark any time soon. You could blame him–and some have–for creating the very bubble he’s complaining about by keeping the cost of lending so low for so long. But you also have to admit he has a pretty solid excuse for continuing to do nothing about the issue: With the Federal Reserve committed to keeping its benchmark rate steady through 2014, hiking up rates north of the border would send the loonie soaring and likely slam Canada’s already sputtering exports.

And while this awkward pass-the-buck dance continues, the ratio of Canadian household debt to personal disposable income is nearing the peak levels seen in the U.S. and the U.K. before their respective housing busts. In the end, Flaherty may just have to bite the bullet and be the one to step in to try to fix things.

He’s already poured cold water onto the housing market a number of times since 2008: shortening the maximum amortization period for new mortgages from 40 years to 35 and then 30 years, raising the minimum down payment required to qualify for government insurance, and demanding that borrowers who get insurance qualify at least for a five-year fixed-rate mortgage. But it’s easy to see why he’s reluctant to do so again: none of the previous policy tweaks worked, but the next one could work all too well. No one quite knows how one engineers a soft landing of the housing market versus accidentally popping the bubble. Will shortening amortization periods to 25 years scare away speculators and delusional buyers or discourage too many Canadians from buying a house, plunging the entire sector into a crisis?

On the other hand, if the housing market really must blow up, it might as well be in the finance minister’s face. After all, it was under the Conservatives’ watch, back to 2006, that the CMHC extended the maximum amortization period from 25 years to four decades–arguably opening Canada’s door, as we wrote in 2008, to subprime-style practices. I’m afraid the hot potato remains in your camp, Mr. Flaherty.

Why the federal budget said nothing about mortgages

  1. People who believe in invisible market-forces always forget about the ‘other hand’……the one that whaps you in the head with a crash.

    • That other hand is there to keep the speculators in check.  CMHC tries to handcuff the invisible hand.

      •  Well cheer up, the handcuffs are invisible too.

  2. Another housing issue that didn’t warrant budget comment was “affordable housing.”  In Saskatoon and other parts of the booming west, even rental units are out of reach for the average Joe.

    • If the economy is booming, why does one need the federal government to provide housing.

      The city council can solve the problem.  Require the private developers who are building upper end housing to simultaneously build affordable housing.  Or put a designated development charge on those who are building upper end housing to raise money for the city to build its own affordable housing.  Or put a land transfer tax on resales and dedicate it to building affordable housing.

      There is no need for the general Canadian taxpayer to solve a local problem.  Housing is local.   The problem is spineless city councils in the pockets of developers.

      • While I agree spineless & often currupt city councils are a big part of the problem, doesn`t your logic require the problem to solve itself?  All of your solutions will reduce profit for the suburban developers who usually control city council?
        City-run affordable housing doesn`t exactly have a great track record.  It`s often built on marginal land that nobody else wants and many shortcuts are made in the construction, resulting in maintanance costs that are unsustainable at current funding levels.

        Also, if it`s a local problem, why is it prevalent in at least four provinces?  A booming economy doesn`t help pensioners or anyone else on a fixed income.

        • Literally billions of private dollars are going into private housing in Vancouver and Toronto (and Calgary and Edmonton and Saskatoon).

          Is it more appropriate to tax that real estate demand and speculation to pay for affordable housing, or to increase income taxes on the average Canadian taxpayer, many of who don’t own a home.

          Affordable housing solves itself where there is real estate speculation if the city council just taxes the speculative froth by the three methods which I’ve suggested
          1) Make building affordable housing a condition of building the developers desired private development.

          or

          2) Development surcharges
          3) Land transfer taxes on resales.

          It is somewhat ridiculous that the Canadian taxpayer should be paying for housing and infrastructure in booming cities.  The city’s politicians just have to get the guts to tax the real estate froth.  If there is money for private real estate development, there is money for infrastructure and public housing.  Leave the Canadian taxpayer alone.

      • No, the market will solve the problem. If there really is demand, than someone will provide the supply. Simple as that. If there’s a sale to be made, someone will provide the good.

    • Just to put things in perspective, my wife & I took a 30% pay cut to move from Regina to Sudbury so that we could buy a house.  We have no consumer debt, and we would have had to pretty much double our income to afford a house in Regina, one of the West`s more affordable cities.  Sudbury is well above the Ontario average.

      On the other hand, I`m no longer competing with 4,000 designated accountants for an entry-level position like I was in Regina, one of the advantages of being outside the boom.

  3. Banks calling for regulation to prevent competition from driving the prudent ones into the ground? Why that’s unpossible! Everybody knows that free markets uber alles solves all the woes of mankind!

    • There really isn’t a free market at work for housing because CMHC is a taxpayer guaranteed moral hazard.  The CMHC interferes with free market signals by distorting what the free market would be willing to insure when left to its own devices.

      • And if the banks were calling for regulation to address the CMHC you’d have a point.

        However, given that the CMHC provides the same services for all banks, and that the banks are still worried about how much trouble their getting into but can’t stop themselves because of the competition… you’re pointless.

  4. Flaherty doesn’t have to do anything. There are 3 big changes on the way already, and they’re not seen as being caused by the Finance Minister (although of course, he could reverse any of them ):

    - CMHC is swiftly reaching its legislated asset limit, and therefore will soon begin rationing its insurance to not much above the room created by expiring mortgages.
    - changes in banking regulations permit banks to refuse renewals based on loss of ability to pay.  Lose your job, lose your mortgage.  And you can’t hide your inability to pay via HELOC, because that too must be wound up after 5 years.
    - another banking regulation change makes any new HELOCs no longer be interest-only, must now include principal repayment

    And once prices start heading down:
    - another banking regulation allows banks to require mortgagees to pay the equity gap upon renewal if their house is ‘underwater’.

    It’s a recipe for pricking the bubble, and a hard landing.

    • Could you cite your source please? I’m curious about these changes to the regulations, as I haven’t seen anything about it anywhere else.

  5. It was a boomer budget, by boomers, for boomers.  Most boomers will not be effected by OAS changes, nor will their retirement nest eggs be cracked by busting up the housing Ponzi scheme.  Too bad Gen X & Y’s are oblivious to how badly they are getting screwed. 

    • Oblivious or just used to it.

  6. What ever happened to the buck stops here.

  7. This is typical Tea Party ideology from our nationality-challened government.  The DEREGULATION of the Derivatives Casinos on Wall Street is what caused the bubble to burst and destroyed the world economy.  In 1998 BROOKSLEY BORN, chief of CFTC warned morons Greenspan, Robert Rubin (tax evaders), Larry Summers (fired from Harvard for his misogynist views) and Timmy Geithner (the Deregulation Kid advising The Prez) that unless they brought back the GLASS-STEAGALL 1933 FDR Act, the shadow 15-trillion market in Credit Default Swaps derivates and other machinations of Speculators and over-greedy financial institutiona, the market would fall!

    Instead, Greenspan/Geithern/Summers/Rubin forced her to resign and the rest is History.

    Our deregulation-minded government who believes in the “invisible hand of the Market” is as ignorant as those who allowed the Derivatives Casinos to bring the world economy to its knees. History will repeat itself—but don’t expect this bunch of  “market can do no wrong” blind boys on the Hill to do anything about it!!

  8. What I don’t understand is Flaherty’s comment that “They are in the job of supplying mortgages.” Sure, but competition creates a race to the bottom that they have no choice but to join. That’s the purpose of gov’t regulation, to prevent dangerous and harmful practices (and it’s only role at that- whingy service demanders be damned).

  9. What you really need to do is look at the purchasers of these homes and condos. Are they Canadians or is it mostly sovereign investment . That is the real question. There are several noteworthy individuals who know this answer. I suspect that while the True Canadians are increasing their debit with these low mortgages the housing bubble will burst on these individuals and not the rest.

  10. I think the market in Vancouver should be fine this year.

    What do you think the Vancouver Real Estate market in terms of housing price in 2012?
    Vote your view in http://www.Vancouver-housing.ca

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