Under those orders, CMHC bought $69-billion worth of mortgages. It was a strategic move by the government: The banks continued to lend, Canadians continued to borrow, and after a short downturn, housing prices began to snap back in early 2009, helping to lead the country out of recession.
Fears of a housing bubble
Ottawa’s plan worked – too well. By early 2010, home prices were rising so quickly that a number of bank CEOs had become concerned.
Mr. Flaherty asked officials in the Finance Department to get him more information on real estate speculation, according to 773 pages of government documents that were released to The Globe and Mail on Dec. 24, nearly seven months after they were requested under the Access to Information Act.
The minister’s officials responded with a memo marked ``Secret`` on Feb 5, 2010, which included a section on mortgage insurance products.
Most of the memo has been redacted, and it is unclear what influence the memo had on Mr. Flaherty’s next move. On Feb. 16, he announced new restrictions on CMHC insurance covering investment properties. He also cut the amount of equity that people were allowed to take out of their homes when refinancing.
The moves were made so quickly that Finance had yet to work out the details. In fact, the documents show that 10 days after Mr. Flaherty`s announcement, he received another memo that was labelled “secret” about how the changes would be implemented. “We plan to define an owner-occupied property as one where the borrower, or an immediate family member, occupies the premise,” it said.
Yet questions about the housing market persisted. In April, 2010, Mr. Flaherty’s department sent him an analysis of household debt, which noted that some analysts were raising concerns about a potential bubble.
“While the broad conclusion of this presentation is that there is no clear evidence that a housing bubble exists this is not to suggest that a housing bubble could not develop overtime [sic] in Canada,” the internal memo said.
The economic risks associated with a bubble were significant, the memo said. “A house is most likely to be the single most important asset that Canadian consumers own. Housing is also the largest asset class in the economy. Changes in home prices, therefore, affect directly the wealth position of consumers and impact their spending patterns.”
The mortgage insurance ‘sandbox’
Mr. Flaherty’s swipe at CMHC did little to dampen enthusiasm for real estate. Vancouver`s runaway housing market, which saw prices rise by 19 per cent in the year leading up to April, 2010, was poised for further increases and had economists worrying that the situation was out of control.
By December of that year, Finance Department policy makers were plotting further changes to the mortgage insurance “sandbox,” as they now called it, according to internal documents obtained by The Globe. They wrote a memo seeking a decision from Mr. Flaherty on possible new rules, under the subject line ``Sandbox Options: Housing Finance Changes.”
The next moves came in January, 2011. Thirty-five year mortgages like Sarah O’Brien’s were banned from the sandbox. The government further reduced the amount of equity that could be taken out, and said it would no longer guarantee insurance on home equity lines of credit.
In normal times, those steps might have been enough to cool the market. But as Europe tumbled into a severe economic and political crisis in 2010 and 2011 and the global economic recovery got weaker, interest rates stayed low, making mortgages cheap.
Canada`s banks added to that problem by getting caught up in a mortgage price war. Even so, Mr. Flaherty took no action.
Then, this past June, he and central bank governor Mark Carney flew off to G20 meetings in Los Cabos, Mexico.
By that point, Mr. Flaherty had already been contemplating yet another tightening of mortgage rules for at least a month, according to the documents obtained by The Globe. The Mexico summit reinforced one crucial point for the two men: The euro zone disaster will take years to repair. That meant central bankers like Mr. Carney would be unable to raise interest rates for fear of discouraging business activity.
But those same historically low rates were stoking the housing market. So Mr. Flaherty and Mr. Carney plotted one more move on mortgage insurance, a topic they stewed over on the six-hour flight home from Mexico.
The surprise announcement came the morning of June 21. The government cut the maximum length of an insured mortgage back to 25 years, effectively ending much of the experimentation of the past six years. CMHC would only back mortgages on homes bought for less than $1-million, and refinancing rules were changed for a third time.