Facing the possibility of interest-rate increases during an election campaign and growing worries about consumer debt, Finance Minister Jim Flaherty moved again to unwind some of the riskier mortgage schemes he once sanctioned and encouraged.
As of March 18, the maximum amortization period for government-backed insured mortgages will drop to 30 years from 35. The government will also lower the maximum amount Canadians can borrow in refinancing their mortgages, to 85 per cent of the value of their homes from 90 per cent, and in April will pull government guarantees on lines of credit secured by homes.
By acting now to stop more Canadians from getting in over their heads with debts they won't be able to service, the government is putting political distance between itself and the central bank's inevitable – and inevitably unpopular – return to higher borrowing costs. At the same time, the move gives Bank of Canada Governor Mark Carney added flexibility to leave interest rates alone until he believes raising them is the right course for the economy as a whole, instead of risking economic damage for the sake of a small subset of borrowers.
Mr. Flaherty’s decision also allows the government to separate the issue from a federal budget that could serve as the blueprint for an election campaign just weeks later.
Opposition parties’ reaction to the measures suggests the government would be wise to neutralize the debt issue now, lest a possible spring campaign be peppered with reminders that the loose borrowing climate for the housing market was in part created by the Harper government.
Most economists say Mr. Carney, who will likely leave his benchmark interest rate at 1 per cent Tuesday morning, could be on hold until at least midyear, now that Mr. Flaherty has taken another crack at a problem the central bank sees as the No. 1 risk associated with having rates so low.
“There is a clear linkage between what Finance is doing and monetary policy,” said Benjamin Tal, deputy chief economist at CIBC World Markets in Toronto. “If [Finance] didn't move, then Carney might have been more aggressive. So there is a linkage and the timing is maybe designed to separate the two and show there is no linkage, but there is.''
At a news conference in Ottawa, Mr. Flaherty said government policy aims to strike a balance between supporting the housing market and avoiding debt trouble.
By that, he was referring to the fact that his government already acted in 2008 to reduce the maximum government-backed mortgage from 40 years to 35 years, as well as introducing measures last year that made it harder to qualify for mortgages. On Monday, Mr. Flaherty indicated the government is particularly concerned about Canadians using home-backed lines of credit for frivolous purchases.
“Some of those loans are not used to create housing,” he said. “They’re used to buy boats and cars and big-screen TVs, things like that. And that’s not the business that [mortgage] insurance was designed for.”
The governing Conservatives are clearly attempting to use these moves to further their argument – highlighted again in new political ads this week – that only they can be trusted to be prudent managers of the economy. Yet by tying the party’s brand so closely to Mr. Carney’s warnings about consumer debt, the Conservatives may run the risk of negative associations as the Bank moves to lift rates.
Moreover, Mr. Flaherty’s critics are quick to point out that his first budget stoked the conditions that allowed some borrowers to get in way over their heads.
