Is Ottawa about to burst the housing bubble?
The new oversight of CMHC may address one problem but causes another.
As anyone who's ever gained weight can attest, inflation is a relatively straightforward process. The real art is strategic deflation.
That's something with which the federal government is currently grappling: how to let some of the air out of the $1.1 trillion Canadian housing market without making it a big, destructive pop. For the sake of the fragile economy and public interest, it's got to be more like gradually easing an air mattress back down to size, and less like bursting a balloon.
That's exactly why Finance Minister Jim Flaherty has brought two acronyms together and handed supervision of the Canada Mortgage and Housing Corporation (CMHC) over to the Office of the Superintendent of Financial Institutions (OSFI). It's his response to growing concerns that government-guaranteed mortgages are fuelling a stubbornly hot housing market.
Specifically, the legislation expands CMHC's mandate — and opens it up to increased scrutiny — to ensure its operations are fully aligned with the need for the stability of the overall financial system and housing market. CMHC's assets have grown 12-fold between 2000 and 2010.
Separately, OSFI is already tightening the mortgage lending criteria for Canadian banks.
As the highly-regarded regulator of Canada's financial services sector, OSFI is best equipped to engineer a soft landing for the home mortgage sector. Furthermore, OSFI doesn't face the political distractions of Human Resources and Social Development, the government department that currently oversees CMHC.
Mr. Flaherty's actions — which were outlined in the Budget Implementation Act just delivered to Parliament — means he has been chatting again with the Governor of the Bank of Canada. For some time now, Mark Carney has been warning Canadians that household debt is at dangerously high levels. And the inevitable increase in interest rates will be devastating for millions of highly leveraged Canadians.
Mr. Carney's particular concern is that the average home price in Canada is running at 4.75 times people's income, compared to the historic average of 3.5 times people's income. At the same time, the ratio of household debt to disposable income is 153 per cent.
To be fair, over the past several years CMHC has already taken several steps to toughen the criteria for the home loans it insures when a purchaser makes a deposit of less than 20 per cent.
The CMHC has reduced the maximum amortization period for high-ratio loans to 30 years from 35 years. It has cut the maximum insurable mortgage to 85 per cent of a property's price from 90 per cent, as well as eliminating insurance on non-amortizing home equity lines of credit.
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