As current global financial woes attest all too vividly, governments are more adept at reacting to the booms and busts of the economies that they manage than they are at actually managing them. The United States is still cleaning up the mess created by its housing and mortgage crises, and every day brings fresh worries from the fractious euro zone. Given this, Canadians should be relieved that they have a federal government willing to use in a proactive fashion the limited tools at its disposal to rein in consumer debt and cool an urban housing market that has all the makings of a bubble.
Finance Minister Jim Flaherty is clearly worried about that bubble. In Toronto, home prices continue to rise even though large numbers of new condominiums are on the market; other major Canadian cities are similarly over-priced, and yet Canadians continue to buy homes and assume ever more mortgage debt at a time when incomes aren’t rising and Europe’s troubles threaten to land on our shores. A fiscal conservative might have preferred that the market correct the situation through a rise in interest rates, but it has become apparent that Canada won’t see an increase in the Bank of Canada rate for at least a year. His last resort, then, was to tighten the rules for mortgages insured by the Canadian Mortgage and Housing Corporation, a federal Crown corporation.
The essential changes – further reducing the maximum amortization period for CMHC-insured mortgages from 30 years to 25 (already reduced from 35 to 30 years in January, 2011) and limiting their availability to homes with a purchase price of less than $1-million – will no doubt make it more difficult for some Canadians to benefit from government-backed mortgages. But Mr. Flaherty is right to say that he could not wait to see whether or not Europe’s troubles impact Canada before he acted.
By moving now, he has sent the painful but necessary message to Canadians that they cannot blindly continue to buy expensive homes with the minimal down payments afforded by CMHC insurance. He has also protected Canadian taxpayers should a real estate crash cause a run on the publicly owned CMHC, and he has enhanced Canada’s enviable international reputation for fiscal prudence.