The Globe and Mail
Published Monday, Oct. 22 2012, 6:00 AM EDT
Last updated Monday, Oct. 22 2012, 2:37 PM EDT
When Finance Minister Jim Flaherty took steps to cool the housing market over the past four years, he largely did so via the Canada Mortgage and Housing Corp., the Crown corporation that dominates the mortgage insurance market.
Now he says his interventions in the housing market are at an end – and he would like to see the CMHC privatized in the next five to 10 years.
“We’ve taken four steps over the last four years to reduce the exposure there for taxpayers, so I don’t think there’s a lot more to do with CMHC or mortgage insurance, certainly not in the foreseeable future,” Mr. Flaherty said in an interview.
Mr. Flaherty’s goal has been to steer the market away from the extremes that rocked the U.S. economy, and to keep mortgage debt loads under control despite the lure of low interest rates.
But the Finance Minister has also been aiming to cut the amount of exposure that taxpayers have to the housing market by way of mortgage insurance and CMHC.
Privatizing CMHC would be a step in that direction, although some economists raise questions about whether Ottawa should relinquish control of a major lever on the housing market.
Ottawa has made a series of quiet changes to bolster the oversight of CMHC in recent years: adding to its board of directors the deputy minister of finance and the deputy minister of human resources and skills development, as well as putting the Crown corporation under the official eye of the country’s banking regulator.
“This is all about financial stability, because [CMHC is] a very important part of the market and of the financial stability picture in Canada, and it’s kind of been off on its own track,” Mr. Flaherty said.
Meanwhile, the housing market interventions by Mr. Flaherty that have drawn the most notice restricted the availability of mortgage insurance four separate times, each time by making it a bit harder for Canadians to obtain mortgages. The most recent changes included cutting the maximum length of an insured mortgage from 30 years to 25, a move that industry players say knocked a number of first-time buyers out of the market.
Ultimately, he would like to see the government get out of the mortgage insurance business. “The history of CMHC has to do with providing adequate housing for veterans after the Second World War, and it’s become something rather grander,” he said.
“I think in the next five or ten years the government needs to look at getting out of some businesses that we’re in that we don’t need to be in.”
His comments come at a time when experts are still debating whether the changes that Mr. Flaherty has made to the mortgage insurance rules have been too little, just right, or too much.
House sales across the country fell significantly in the period immediately after he made the latest set of changes, which took effect July 9, and a number of people in the real-estate industry argue that he went too far. But some economists fear that the changes will not have enough of a lasting impact, and that as it becomes increasingly likely that interest rates will stay low for even longer than expected, the mortgage debt binge will resume.
“My concern is that the changes in the mortgage insurance rules will probably be felt for three to six months and then the market will go back to really just focusing on underlying fundamentals, and one of the things that’s going to be there is extremely low interest rates that will still incent people into real estate,” said Toronto-Dominion Bank economist Craig Alexander. “So I think we may end up in an environment where we might actually need the mortgage insurance rules tightened further.”
That’s because with both inflation and U.S. interest rates low, the Bank of Canada is unlikely to raise interest rates much. But if Mr. Flaherty doesn’t want to tighten the housing market further, pressure on central bank Governor Mark Carney could build.
Just last week, Statistics Canada said that the country’s household debt was higher than previously thought, as a result of economic revisions. The biggest component of that debt, by far, is mortgages.
“The revisions to the consumer debt numbers are troubling,” Mr. Alexander said. “If we got hit with an unemployment shock or an interest rate shock, the household sector would be quite vulnerable.”
And the International Monetary Fund recently urged Mr. Flaherty to be prepared to change the rules again if necessary. The IMF cut its economic forecasts for Canada earlier this month, and said the country’s key priority must be to keep a lid on risks from the housing sector and household debt. It said the changes that Mr. Flaherty has made thus far have been successful in slowing the rise of mortgage debt, but “if household leverage continues to rise, additional measures may need to be considered.”
In making his moves, Mr. Flaherty has carefully been weighing the need to get house prices and consumer debt levels under control with the need to keep the economy humming. “We need to be mindful that the housing market, single-family, housing condominium developments, provide a tremendous amount of employment in Canada,” he said.