Policymakers Advised to Avoid Over-Reliance on Short-Term Measures
In a recent address to the Economic Club of Canada in Toronto, Bank of Canada deputy governor Carolyn Rogers cautioned policymakers against "tinkering" with the mortgage market in an effort to improve housing affordability. Rogers warned that over-reliance on such measures could have long-term negative impacts on the financial health of households, the mortgage market, and the economy.
New Mortgage Rules: A Mixed Bag
Recently, the federal government introduced new mortgage rules aimed at improving housing affordability. These rules include expanding 30-year amortizations to all first-time homebuyers and to all buyers of new builds, effective next month. Additionally, the price cap for insured mortgages has been raised from $1 million to $1.5 million, allowing more Canadians to qualify for a mortgage with a down payment below 20%.
Rogers’ Warning: Short-Term Gains May Come at Long-Term Cost
According to Rogers, while these measures may provide short-term relief to households and the mortgage market, they also increase risk for lenders and borrowers. She cited an example of a borrower who increases their amortization from 25 years to 30 years, shaving $200 off their monthly payments but adding an additional $50,000 in interest costs over the lifetime of their mortgage.
A Better Balance: Supply and Demand
Rogers emphasized that improving housing affordability will require a better balance between supply and demand. However, this will take time to achieve. In the meantime, she warned against relying too heavily on measures that reduce the short-term cost of financing, as they could have long-term impacts on the financial health of households, the mortgage market, and the economy.
Mortgage Renewal Cycle: A ‘Tail Risk’
Rogers also addressed concerns about the impending mortgage renewal cycle. While many experts warn of a potential increase in delinquencies due to higher interest rates, Rogers maintained that the Bank of Canada only considers this a "tail risk" to the economy. She noted that the central bank’s forecast is for interest rates to come down, which will reduce the impact on consumption.
CMHC Report: Delinquencies Expected to Rise
Just days before Rogers’ address, Canada Mortgage and Housing Corp. (CMHC) released its fall report, which showed nearly 1.2 million fixed-rate mortgages are up for renewal next year, most at higher rates. CMHC maintains that the mortgage renewal cycle remains a risk to the economy, as delinquencies are expected to increase.
A History of Responsible Mortgage Payments
Rogers pointed out that Canadians have a long history of paying their mortgages on time. She cited the 2008-09 financial crisis as an example, when Canada’s mortgage arrears rate never went above 0.5%. Given this recent experience, Rogers emphasized that it is a good time to reflect on the economy and its future.
Conclusion
In conclusion, Carolyn Rogers’ address serves as a reminder of the importance of caution when implementing policies aimed at improving housing affordability. While short-term measures may provide relief, they must be balanced against long-term consequences. By prioritizing responsible lending practices and promoting economic stability, policymakers can work towards creating a more sustainable mortgage market for all Canadians.
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