After taking a few months to get a feel for the place, one of the first things Evan Siddall did as president of Canada Mortgage and Housing Corp. was gather his leadership team to rewrite the agency’s mission statement.
Siddall’s previous job was as a senior adviser at the Bank of Canada, where he helped clean up after the financial crisis. That experience informed his overhaul of CMHC, which had grown so enthralled with juicing homeownership rates that it had become a threat to financial stability. The post-crisis leadership decided the Crown mortgage insurer would focus on the housing needs of Canadians, not their wants. To his credit, Siddall hasn’t shied from explaining what that means.
“Ample support exists already for first-time homebuyers,” Siddall told an audience in Vancouver in November 2016, a time when that city’s housing frenzy had made everyone crazy for more support. “As I’ve said, too much encouragement to buy homes exposes vulnerable people to excessive financial risk, pushes prices higher where acute supply inelasticity exists — like here in Vancouver — and jeopardizes our economic prospects.”
If only the political class would update its mission statement to say that it’s OK to try to save us from ourselves.
Siddall’s various overseers in Ottawa either absorbed different lessons from the financial crisis, or forgot that the Great Recession was caused by a housing bust preceded by a massive stockpiling of personal debt.
Stephen Harper, whose government appointed Siddall, told voters in 2015 that if re-elected, he would allow first-time homebuyers to withdraw more from their Registered Retirement Savings Plans to help cover down payments.
Harper never got a chance to implement that policy, but Finance Minister Bill Morneau brought it back to life in his pre-election budget in March. Morneau also introduced a new perk that allows first-time home buyers with household incomes of $120,000 or less to apply for a shared-equity loan from CMHC for purchases of up to $500,000.
And on the first full day of the campaign this week, Trudeau said a re-elected Liberal government would raise that maximum to $800,000 in Victoria, Metro Vancouver, and the Greater Toronto Area, places where the median house price is off the charts, and home to a critical mass of the Liberal caucus. More cities would qualify once their housing markets enter the stratosphere, so Montreal will join the list eventually, maybe even in the next few weeks, depending on the polls.
“Too many people are finding it tough to afford their first home,” Trudeau tweeted. “We are going to do something about it.”
New homes under construction in Bradford, Ont. “High levels of household debt remain the main risk to Canadian financial stability,” says Lawrence Schembri, deputy governor at the Bank of Canada.
There are lots of stories about what caused the Great Recession. My favourite is by Raghuram Rajan, the University of Chicago economist and former head of the Reserve Bank of India, who argued in his 2010 book Fault Lines that craven politicians were the true villains.
As the American Dream grew too expensive for many Americans, he wrote, elected officials might have encouraged voters to accept reality, while at the same time working on strategic policies that would strengthen productivity and boost incomes. Instead, over decades, they introduced all sorts of incentives that encouraged Americans to finance their wants. Household debt detached from fundamentals such as income growth, leaving the economy vulnerable to a shock, which arrived in 2008.
Rajan’s story should make Canadian listeners uncomfortable.
Statistics Canada reported Friday that household debt was 177 per cent of income, a 60-per-cent increase from 2000, and that debt service costs were 15 per cent of income, the highest percentage on records that date to 1990.
Personal consumption dropped in the second quarter, despite low levels of unemployment, raising the possibility that consumers realized they had overstretched. “High levels of household debt remain the main risk to Canadian financial stability,” Lawrence Schembri, deputy governor at the Bank of Canada, told an audience in Halifax last week.
There are no heroes in a Rajanian fable, but if there were, they would fight to get rid of all these distortionary policies and allow markets to do what they do.
Morneau at least showed awareness by choosing a housing sop that forces first-time buyers to accept CMHC as a co-investor, rather than add it to their list of creditors. He also reduced harm by keeping the maximum purchase price relatively low, ensuring the program would be useless to anyone who was overly desperate to join the most bubbly markets.
Interesting thing about the (Liberal) move (to $800,000) is that it’s actually undermining the most elegant part of the original proposal
Rob Gillezeau, assistant professor of economics, University of Victoria
Trudeau’s first announcement of the campaign could change that. If the shared-equity incentive was doctored to have a neutral effect before, the new version would look more like a stimulant.
“Interesting thing about the (Liberal) move here is that it’s actually undermining the most elegant part of the original proposal,” said Rob Gillezeau, an assistant professor of economics at the University of Victoria who served as former Opposition leader Thomas Mulcair’s chief economist. “The price levels were clearly originally set to avoid contributing to overheating in (Vancouver, Victoria, Toronto) and boost prices in slower markets.”
Andrew Scheer still has lots of time to prove me wrong, but based on what we know now, a Conservative government could make the household debt situation even worse.
When Schembri re-iterated the Bank of Canada’s worries about debt earlier this month, he added a note of hopefulness. “With tighter mortgage rules in place, the quality of the stock of debt should continue to improve,” he said, referring to the 2018 regulation that requires lenders to base mortgages on borrowers’ ability to absorb a change in conditions, such as a spike in interest rates.
So, the policy is working. Here’s what Scheer said about it when he presented his vision for the economy in May: “I will rework the mortgage stress test the Liberals brought in a couple of years ago that pushed the dream of homeownership out of reach of so many Canadians across the country, so more Canadians can have the freedom to shop for better rates.”
The only thing wrong with the stress test is that Morneau waited too long to give it a green light. The Liberal government has taken financial stability more seriously than its predecessor, but it’s still been passive. Trudeau’s other real estate announcement this week was that he would also curb “foreign speculation.” Why only foreign? Probably because all those lucky people who owned homes at the start of Canada’s housing boom vote too.
•Email: kcarmichael@postmedia.com | CarmichaelKevin
