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Saturday, July 30th, 2016

Canadians Deserve More Answers

Boris Bozic, CAAMP Chair and President/CEO of Merix Financial wrotethis about the latest mortgage rule changes:

“…Stakeholders have every right to call out decision makers if there’s concerns that [mortgage rule changes] may have unintended consequences. We also have every right to ask decision makers to articulate, in a clear and cogent fashion, the rationale behind the decisions they made.”

As usual, Boris is practical and thoughtful in his commentary, and clearly right.

It makes you wonder, however. If people question policymakers, how much do they really listen?

Finance Minister Flaherty has been pulling puppet strings at will in the housing market. In doing so, he’s erased significant borrowing options and elevated short-to-medium-term housing risk, while providing only the skimpiest of details about his decision-making process.

The government professes it changed the rules to reduce Canadians’ interest costs, encourage equity accumulation and prevent overborrowing.

Those are seemingly worthy objectives. But economic and housing stability is hanging in the balance. Folks deserve more details on the alternatives to, and side effects of, Flaherty’s forced savings plan and retreat from housing finance.

Market share analysisFlaherty states his team has done the analysis. “We have lots of people who look at the numbers,” he says.

If so, the Finance Department should share its research on topics like:

  1. The potential risk to home equity that further borrowing restrictions create for Canada’s 9.6 million existing homeowners
  2. The alternatives to applying blunt rule changes on all Canadians, irrespective of borrower qualifications
    • Certain fringe borrowers needed tighter limits. But the vast majority of insuredhomeowners are unequivocally not a risk to the system.
    • Alternatives could have included limitations on the subset of riskier borrowers, enacting regional restrictions, talking the market down with warnings of future rule changes, letting supply catch up with demand naturally, or a combination of these.
  3. The lost economic output resulting from reduced real estate investment, consumer spending and housing-related employment losses:
    • TD Economics states: “While these new lending rules are not intended to severely impede household spending and housing demand, their impact will be substantial.”
    • Flaherty responds, “I realize it may have some dampening effect on the economy and I realize it may have some dampening effect in the residential real estate market.”
    • Meanwhile, the rest of the country waits for Flaherty to define the word “some?”
  4. The logic of imposing national rules for localized problems (like Toronto condo risk)
  5. The impact of tighter home buying rules on rental costs
  6. What sort of compounding effect these regulations will have if/when unemployment spikes or interest rates rise.

Interest rates, not overborrowing, are the #1 creator of excess housing demand. And interest rates can go up, believe it or not.

In a Globe story today, RBC banking head David McKay acknowledged this by asking: “…What is the longer term implication of all this in a higher rate environment?”

Canada’s housing market “…is like a big ship,” he says. “And it takes a while to turn. And sometimes if you oversteer, you can’t re-steer the other way.”

Yet, with the stroke of a pen, our public servants have changed our ship’s course and summarily eliminated financing choices, choices that are clearly beneficial when used responsibly.

When it comes to the decision-making process behind major housing changes, Canadians deserve more insight than a carefully crafted press release and a hurriedpress conference. Without such details, one might surmise that our well-paid officials have not fully contemplated the ramifications, or perhaps, that there’s something they don’t want us to know.


Rob McLister, CMT

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