Adam Chambers was a director of policy to former finance minister Jim Flaherty and holds a JD/MBA from the University of Western Ontario.
Last week was a bit bizarre. On Tuesday, the Bank of Canada indicated that it could manoeuvre to negative interest rates if economic conditions warrant. On Friday, the Department of Finance, the Canada Mortgage and Housing Corp. (CMHC) and the Office of the Superintendent of Financial Institutions (OSFI) co-ordinated on measures aimed at cooling the housing market. These measures will increase the minimum down payment for new insured mortgages over $500,000 to 10 per cent from 5 per cent, and future changes will be made to the amount of capital that banks must hold against residential mortgages.
Within days, we signalled to the world that we could make debt even cheaper while simultaneously indicating we are concerned about an overheating housing market.
There is no doubt that cheap money has enabled the meteoric rise of housing prices in certain markets, primarily Vancouver and Toronto. We learned recently that the household-debt-to-income ratio is nearing historic heights of almost 164 per cent and that the number of households whose debt exceeds 350 per cent of income now stands at 8 per cent, double the level from before the financial crisis. It's clear that Canadians are addicted to debt.
While the new down payment rules are a welcome policy response, their effects are likely to be restricted to the margins, and they aren't without risks or unintended consequences. The rules apply across Canada, so cities such as Calgary, with traditionally lower minimum down payments and already showing signs of weakness, will have to absorb the changes.
Policy makers also ought to be concerned about a growing number of homeowners who are seeking out non-traditional loans to cover down payment shortfalls. This increases risks to financial stability as many shadow lenders are under-regulated and there is less credible data tracking their activities.
While the co-ordination among Finance, CMHC and OSFI was encouraging, one has to wonder where the Bank of Canada fits into the conversation. Admittedly, Governor Stephen Poloz was clear that there was no imminent plan to use negative interest rates – but it was important to establish what was in the BoC "tool kit." However, from a macro perspective, we must recognize that the prospect of negative interest rates appears, on its face, at cross-purposes with concerns about the housing market.
In addition to slumping oil prices, the Canadian dollar saw more downward pressure as the BoC revelations painted a picture of stark divergence of monetary policy between Canada and the United States. Yes, a lower loonie will help boost non-energy exports, but it also affects capital inflows from foreign jurisdictions.
With every penny the loonie sheds, Canadian assets become more appealing to foreign speculators. Since 2013, those assets (including real estate) have become about 28 and 26 per cent cheaper for American and Chinese investors, respectively.
Recall the flurry of activity regarding the "hollowing out" of Corporate Canada, circa 2006. To believe the fear mongers at the time, foreign investors were pillaging our corporate icons – taking them over, moving their headquarters and well-paying jobs out of the country. Studies were conducted and conferences convened to discuss what was portrayed as a pivotal moment for Corporate Canada.
Where are those voices now? Where are the conferences about the hollowing out of Canadian real estate? The short answer: Unlike most other countries, we don't have the data to support any theory. All we've got is anecdotal evidence of half-empty condo buildings or million-dollar homes in Vancouver that show little signs of life.
In fairness, the CMHC and its new leadership deserve some credit. After releasing unconvincing data on foreign ownership a year ago, it now says it is working with partners to fill in the data gaps. However, the pace and stubbornness with which CMHC has traditionally moved leaves one wondering if we'll finally figure it out just as the pain sets in.
If we're serious about cooling the housing market, we cannot ignore the risks of an increasing debt burden or the potential role of foreign speculation in our real property market. Any discussion of options without credible data would be unwise. With a larger number of aging adults relying on the sale of a home to finance their retirement, the risks of willful blindness are too great.
Policy makers are not in an enviable position, but with a new government and potential unchartered waters ahead, it's even more important that they appear co-ordinated. We could be in for a bumpy ride.