Last May, as the Canadian economy emerged only tentatively from lockdowns imposed in March, the head of the federal agency mandated to monitor the health of the country’s housing sector made the mistake of worrying out loud about the disaster he feared was coming.
It was hardly the first time that Evan Siddall had warned about the toxic combination of elevated household debt levels and public policies that served to boost housing demand. But in his May 19 testimony before the House of Commons finance committee, the Canada Mortgage and Housing Corp. chief executive officer sounded the alarm with renewed urgency.
“Almost everything we have done in response to the crisis involves borrowing. Just as governments are taking on more debt to finance the COVID-19 response, mortgage deferrals are adding to already historic levels of household indebtedness,” Mr. Siddall told MPs. “The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability.”
At the time, the agency Mr. Siddall heads was forecasting a housing price decline of between 9 per cent and 18 per cent in 2020. Mr. Siddall felt obliged to speak up, he said, “to avoid exposing young people, and through CMHC, Canadian taxpayers, to the amplified losses that result from falling house prices.”
As the whole world now knows, Mr. Siddall was wrong – big time – about housing prices crashing. Extraordinary fiscal stimulus turbocharged household disposable income, while the lowest interest rates in memory prompted Canadians to pile into stocks and property at rates almost no one could have predicted. Instead of falling, housing prices rose by double digits.
On Monday, a chastened CMHC head posted a Twitter thread to atone for his forecasting failure. “Times were uncertain and I felt that a warning about house prices was responsible,” he tweeted. “That said, we never pretended to have a crystal ball.”
Mr. Siddall’s critics – and there are many of them among the country’s 135,000 real estate agents and brokers – wasted no time rubbing it in on social media. After all, they had long resented Mr. Siddall’s calls for more discipline among lenders and agents alike. Some even blamed his bearish forecasts for scaring off younger buyers and prompting nervous homeowners to forfeit big gains by selling their properties prematurely.
The real estate industry also got angry at Mr. Siddall, who announced on Tuesday that he is stepping down as CMHC chief in April, for moving to tighten eligibility rules for the mortgage insurance it sells to banks to cover highly leveraged borrowers. But the change had little impact, as banks shifted their business to private insurers, undermining the federal agency’s efforts to protect first-time buyers from taking on too much debt.
Frankly, in spite of one bad call, Mr. Siddall deserves to be praised rather than pilloried for acting as a rare voice of caution in Ottawa. Easy credit and dysfunctional housing policies that stoke demand have left us with a market that is dangerously out of whack with reality. Shouldn’t at least someone in a position of power speak up before it’s too late?
After all, nothing about Canada’s current housing frenzy is natural or healthy. It is the result of a decision by fiscal and monetary policy makers in Ottawa to flood the Canadian economy with unprecedented liquidity to get through the pandemic and worry about the consequences later. The fiscal and monetary stimulus of the past year has pumped helium into the stock and real estate markets, yet the central bank dismisses bubble concerns. Go figure.
Last week, Bank of Canada Governor Tiff Macklem conceded that the central bank is “starting to see some early signs of excess exuberance” in the housing market – but not enough for him to consider raising interest rates or reining in the bank’s purchases of government of Canada bonds. Rather, the central bank is focused on restoring the economy to full employment, even though that is not explicitly part of its mandate. The latter involves keeping the annual inflation rate around its 2-per-cent target, although the bank has increasingly come under fire for measuring inflation too narrowly. Some investors have also started to question the bank’s commitment to low inflation as it moves to tackle redistributive issues such as inequality.
Mr. Macklem insisted last week that the bank’s focus on restoring the economy to full employment is consistent with its inflation mandate because “the shortfall in jobs and income will pull inflation down.” But if the Canadian economy has indeed embarked on a K-shaped recovery, extraordinary monetary stimulus only risks further inflating bubbles in stock and real estate markets, while doing little to help low-wage workers. Addressing joblessness among women, minorities and young Canadians – those hit hardest by the pandemic lockdowns – is better left to fiscal policy makers with the ability to target help directly at those who need it.
Meanwhile, Mr. Macklem should worry a bit more about the house prices, whose buoyancy is a direct result of his policies. As Canada’s housing market surfs on a wave of monetary stimulus that must eventually ebb, Mr. Siddall may have the final word.
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