ToHon. Jim FlahertyYour MP's name hereSirs,I am writing you supporting potential changes to mortgage financing rules in the upcoming year. As you are undoubtedly aware, the average Canadian household debt to household income ratio has increased significantly in the past number of years and has now exceeded that of the United States. This was made possible by historically, and unsustainably, low interest rates on mortgages. As has been shown in other OECD countries, there is some evidence to suggest that households are primarily concerned with their short-term financial health -- the ability to service today's debt with low interest rates -- and less concerned with their long-term financial health -- the inability to service service tomorrow's debt with high interest rates. I have not seen any data or arguments to suggest that household debt will start decreasing in the coming year as long as interest rates remain low. My concern is that without further tightening of mortgage financing rules, Canadians will continue to take on debts that are unsustainable in the long-term.While I am a believer in free markets, the growth in household debt is not sustainable when interest rates rise and I am not confident households will start saving while debt is so "cheap". If measures are not taken sooner rather than later, the resulting overhang of debt will put Canada at a distinct disadvantage relative to its trading partners, whose households have started to rebuild their balance sheets and will be in a much better position to weather the inevitable interest rate rises in the coming years.SincerelyYour NameYour Address
In response, Mr. Flaherty sent me this response via Canada Post:
Dear (redacted):Thank you for the correspondence of January 6, 2011 regarding Canada's housing market. Please excuse the delay in replying.The economy remains our Government's top priority. Although Canada is still recovering from the impact of the global economic recession, we have emerged stronger than most other countries. We are helping to support both economic growth and job creation through Canada's Economic Action Plan and through important tax relief for Canadians. Furthermore, we are encouraging responsible home ownership through measures to help first-time home buyers.Canada's strong housing sector, especially our traditionally prudent mortgage market and responsible lending practices, has also been important to our economic recovery. Unlike the citizens of other countries, such as the United States, Canadians did not face mass foreclosures on their homes, and our banks did not require taxpayer bailouts due to turmoil in the housing market.A home is a family's most important investment, and a stable and secure housing market keeps our economy strong. That is why our Government continually monitors the housing market, ready to take careful steps to ensure its ongoing stability.In 2008, and again in 2010, our Government took proactive steps to protect and strengthen the Canadian housing market. In 2008, we announced measures reducing the maximum amortization period for new government-backed mortgages to 35 years, requiring a 5-percent minimum down payment, bringing in new loan documentation standards, and requiring a consistent minimum credit score. In 2010, we introduced additional adjustments requiring buyers to meet a five-year, fixed-rate mortgage standard, lowering the home refinancing amount that financial institutions can offer from 95 percent to 90 percent, and requiring a 20-percent down payment to non-owner-occupied properties purchased for speculation.Recently, we announced further important and prudent measures to encourage Canadian families to make sound investments in their homes. First, we reduced the maximum mortgage amortization period from 35 years to 30 years for new government-backed insured mortgage (that is, for mortgages with loan-to-value ratios of more than 80 percent). This measure will significantly reduce the total interest paid by Canadian families over the lifetime of their mortgages. It will also allow Canadians to build up equity in their homes more quickly and helps them pay off their mortgages before retirement.Second, we lowered the maximum amount lenders can provide when refinancing insured mortgages from 90 percent to 85 percent of the value of the property. For example, for a home valued at $300,000, refinancing at 90 percent would allow the homeowner to access up to $270,000 whereas refinancing at 85 percent would provide the homeowner access up to $255,000. The lower refinancing limit means homeowners will keep an additional $15,000 in equity in their homes and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.Third, we withdrew government insurance backing on home equity lines of credit (HELOCSs). Taxpayers should not bear any risk associated with such consumer credit products. These risks should be managed by the financial institutions that offer these products.These measures underline our Government's continued action to protect the stability of the economy by ensuring lenders' practices are sustainable and the investments of Canadian families in their homes are secure. This will decrease the interest payments of Canadian families by tens of thousands of dollars over the life of a mortgage, helping to improve the financial well-being of Canadian households.Our Government's ongoing monitoring and sound supervisory regime, along with the traditionally prudent approach taken by Canadian financial institutions to mortgage lending, has allowed Canada to maintain a strong and secure housing market.Thank you for communicating your concerns.SincerelyJames M. Flaherty
First, I thank the Honourable Minister for his long and detailed response. The views expressed below are my own and not necessarily those of other authors on this blog.
There are many things about Canada's housing market for which the government can take some credit, namely that mortgages are generally more conservative than the filth that was promoted in the United States last decade. It should be stated, however, that the rule changes Mr. Flaherty cites as indication of his government's willingness to reduce debt loads are retrenchment of very rules his government brought in earlier last decade.
The government's "Economic Action Plan" -- "backfilling" spending when private demand was lacking -- was generally a reasonable response given the severity of the economic slowdown that started in late 2007 and continued into 2009. My concern with the implementation of this action plan, which involved heavy lending through CMHC-insured vehicles, is that it involved increasing debt loads on assets that were already showing signs of over-valuation before the recession. Unlike government debts that can be reduced through higher future taxation, consumer debts linger.
I am somewhat disappointed that the government sees "housing market stability" as a primary concern, yet certain regions of the country are, and have been, experiencing rapid house-price appreciation. Stability should not solely mean preventing price drops. The government does have at its disposal the ability to control prices on a region-by-region basis by changing CMHC policies, something it hasn't yet done (to my knowledge) for whatever reasons.
In any case, I am not expecting further changes to CMHC policy for the remainder of 2011, though I leave the door open to certain region-based measures aimed at cooling down credit hot spots more swiftly. There are a few ways by which this goal can be accomplished, including targeted capital flow restrictions, informal MOUs with big banks, and internal CMHC policy directives.
I also received the same letter yesterday.
I also share your thoughts about the rule changes and economic action plan.
I differ on the potential future policy response. I would strongly advocate for CMHC limits to align with the rental yield of similar property rather than the current policy of "assessed / appraised value" being used. Appraised or assessed value has no bearing on the level of imputed rental income / earnings potential or inherent risk of the asset being insured. This policy would limit CMHC's exposure in bubble markets, allowing the free market to take on those risks and ensure lending would take place up to non-bubble levels.
I think stability means orderly. Orderly increases and orderly declines are highly desirable from a macro standpoint. The fact that sales and inventory have both decreased is a sign of success.
I just got the exact same letter in response to the one I wrote back in January. I wonder how many were sent out and to what regions.
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