Economic analysis

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.