The tightening of the rules on mortgage insurance, announced in June by Jim Flaherty, the Minister of Finance, was justified to restrain the rise of household debt, although a report by the chief economist of the mortgage brokers association, published on Monday, argues that these measures will slow down the housing market.
Among others, Mark Carney, the Governor of the Bank of Canada, has made a convincing case that the accumulation of debt by Canadian households was dangerous. This phenomenon suggested a real-estate bubble that would inevitably burst. The growth in household debt has moderated, but is still rising.
Mr. Flaherty was right to change the mortgage-insurance rules – including a return to the long-normal amortization period of 25 years. Home-buyers continue to be favoured by remarkably low interest rates.
Will Dunning, the chief economist of the Canadian Association of Accredited Mortgage Professionals, predicts a decline in home sales activity, lasting longer than others have projected, as a result of the rule changes. Up to a point he may be right, but the health of the balance sheets of Canadian families is more important than the velocity of trading in houses and condominium units. Many Canadians have been eating away at their own equity.
Ironically, mortgage brokers themselves may benefit from the rule changes. What is often called “mandatory mortgage loan insurance” is mandatory on banks and other similar federally regulated financial institutions, under the Bank Act.
Some home-buyers may not wish to be protected from themselves. If so, they are free to seek private, non-bank lenders, typically with the help of brokers, if they want long amortization periods, or other terms that do not comply with the rules for mortgage insurance issued by Canada Mortgage and Housing Corp. and its two private-sector competitors.
American households have been sensibly deleveraging since the financial crash of 2007-2008. Canadian consumers, basking in Canada’s comparative economic health, have shown some overconfidence. The federal government, with implicit encouragement from the central bank, has been right to exercise some restraint.