Canada’s new Liberal minority government will have to reckon with big decisions on taxes and spending in a slowing economy. But it will also need to get serious about reducing risks in the housing market.
This could be the big economic hazard of the next four years. There is growing evidence that ultraexpensive urban markets, especially Vancouver and Toronto, are on the boil again. That pads the coffers of banks and real estate companies, but the rebound has a dark side to it, in that it encourages consumers – once again – to take on more debt than they should. And too many households already have too much of it.
Frothy housing markets, high consumer debt loads and an explosion in alternative mortgage lending are creating a powder keg that our 43rd Parliament would be wise to defuse. But as Canadians were reminded during this election campaign, our federal politicians are hardly a logical bunch.
The incoming Liberal government floated housing policies during the campaign that are bound to create new risks in the country’s financial system. They kicked off the campaign with a promise to enhance their first-home buyers program through the government-backed Canada Mortgage and Housing Corp. (CMHC).
Housing policy should not be driven by our federal parties’ desire to curry favour with millennial voters and their baby-boomer parents who are keen to get their adult kids off the teat. The collective risk to the country’s economy is simply too high.
Consumers are already deeply in hock. Canadians owed roughly $1.77 in consumer debt, including mortgages and other loans, for every dollar of household disposable income during the second quarter of 2019, according to the latest data from Statistics Canada.
More concerning is the rising cost of keeping up with those bills. The household debt-service ratio, as the measure is officially known, hit a record 14.93 per cent during the second quarter – the highest level since the financial crisis, when ultralow interest rates encouraged Canadians to binge on cheap credit.
That’s why Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), toughened up the rules for uninsured mortgages in early 2018. Homebuyers with a down payment of at least 20 per cent must now pass a stress test to prove they can afford loan payments if their mortgage rate rises.
Although there continue to be howls of self-serving protest from the real estate industry, tightening the rules was the right thing to do. Trouble is, the Liberals’ housing policies will undoubtedly undermine some of the progress OSFI has made.
Although the Liberals announced no plans to fiddle with the stress test itself, pushing ahead with their first-time home buyer incentive, and even enhancing it in the country’s most expensive cities, is nothing short of irresponsible. The scheme exposes taxpayers to more risk by effectively turning the CMHC into a subprime lender, with interest-free loans to first-time buyers.
The Liberal plan is reckless. It will only drive up demand in the hottest markets, ultimately making the affordability problem worse, especially now that major banks are introducing automated loan approvals and mobile lending that promise a speedier application process. The banks have no reason to clamp down on insured mortgages, in particular; their government-backing makes them risk free.
And it’s not like the Liberals’ minority status will hold them back. Both the Conservatives and NDP campaigned on stretching the maximum amortization period; when it comes to the real estate market, none of the major national parties seems capable of restraint.
It’s not the federal government’s job to put people in houses they cannot afford. The CMHC incentive should be scrapped. In addition, Ottawa should take some leadership on the housing file by urging the provinces to stamp out risks in the alternative-lending market.
The new Liberal minority government will have to juggle competing economic priorities. Stoking fires in the housing market shouldn’t be one of them.
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