Minister of Finance Jim Flaherty responds to a question during question period in the House of Commons Tuesday, March 19, 2013 in Ottawa.Adrian Wyld/The Canadian Press
Jim Flaherty's mortgage-market interventions have drawn criticism from even within his own party, but sources say the Finance Minister's actions were intended to send a blunt message to lenders.
Government sources said Mr. Flaherty's Monday entreaty to Manulife Bank to cancel an advertised mortgage rate cut – one it heeded – were intended to demonstrate he believes the risk of a housing bubble remains and that he is not prepared to look the other way when institutions make it easier to assume more debt.
"It sends a signal," a source said of the measure – one that didn't sit well with fellow Conservative cabinet minister Maxime Bernier on Wednesday.
The outspoken Minister of State for Small Business said he didn't support Mr. Flaherty's office's request to Manulife that it withdraw a rate cut on five-year mortgages to 2.89 per cent from 3.09 per cent.
"Me, personally, I would not dictate to businesses what prices to decide," Mr. Bernier told reporters. "It's the market. It's supply and demand that decides the prices. It is the case for interest rates, it is the case for other products, too."
Mr. Flaherty's extraordinary intrusion into Canada's lending market came despite indications that housing sales are slowing and that economic growth is cooling – two signs that would appear to reduce the risk that home buyers could see mortgage rates rise beyond what they can afford.
February statistics showed a 15.8-per-cent drop in the number of homes changing hands from a year ago – evidence perhaps that Mr. Flaherty's 2012 efforts to cool off the sector are working. Last July Mr. Flaherty enacted tougher mortgage rules in a bid to calm overheated activity.
But government sources said Mr. Flaherty is looking beyond short-term weakness in the economy and is worried an expected medium-term rebound in growth could end up hurting Canadians' ability to absorb increases in mortgage rates.
Mr. Flaherty doesn't want lenders to get the idea that "just because the market is soft in the short term, it's okay to lower mortgages and entice people into the market when he knows in the medium term the economy is going to strengthen and we might very well see interest rates move up," one source said.
The Finance Minister has changed the country's mortgage insurance rules four times since 2008 in an effort to cool the housing market.
It's not the first time he has taken it upon himself to urge businesses to change their behaviour. He has previously phoned the Bank of Montreal to complain about its decision to lower its five-year rate; he has scolded banks about hefty ABM fees and even chided retailers for not lowering sticker prices to reflect the Canadian dollar's strengthening against the U.S. currency.
The most recent changes came last July and included cutting the maximum length of an insured mortgage from 30 years to 25. House sales have dropped significantly since then, and February's sales came in 15.8-per-cent lower than the same month a year ago.
Housing prices have not fallen materially in most of the country, though, and Mr. Flaherty said this year that he would not mind seeing them come down. The latest numbers from the Teranet-National Bank house price index on Wednesday suggest that house prices are still 2.7-per-cent higher than they were a year ago, but they have ticked downwards for six months in a row, falling 0.2 per cent from January to February.
The lower mortgage rates that lenders are now offering are raising concern that the housing market will rebound this spring, causing house prices to start ticking back up and consumers to take on too much debt. Bond rates have been falling, making it economical for lenders to offer lower mortgage rates. And mortgage demand is likely to soften along with sales, making banks more keen to cut rates to compete.
Toronto-Dominion Bank chief economist Craig Alexander said that if Ottawa feels the need to take more action on this front, one tool at its disposal could be setting a minimum interest rate at which people must qualify for an insured mortgage. That would prove buyers could withstand higher rates. But it would not stop them from enjoying lower rates if banks are willing to offer them.