Intervention
Thursday, March 21st, 2013
So this was unusual: Finance Minister Jim Flaherty apparently convinced Manulife Bank to reconsider a rate cut the institution had put in place, citing concerns about consumer debt levels. Manulife had just posted a five-year fixed rate mortgage at 2.89 percent when Mr. Flaherty’s office called the bank with a message that such a move would be “unacceptable.” Two weeks ago, BMO received a similar warning after posting a 2.99 percent five-year fixed rate; that bank, however, decided against rolling back.
While very good, these rates are certainly not unheard of in the broader market.
This type of basically unprecedented intervention is concerning and problematic, even if you can see where the government is coming from. Unlike in Calgary’s market, real estate sales are down significantly in the rest of the country, but prices aren’t yet dropping a commensurate amount. That means those who are looking to buy a home are still paying big prices, and some are taking on large mortgages to cover the costs. Should the market continue to stagnate, prices will inevitably go down and a segment of those new buyers may end up underwater. Flaherty has already made stricter rules around qualifying for mortgages with less than 20 percent down (meaning, those that require insurance through CMHC) four times in recent years, and has now, it seems, taken to pressuring private lenders directly.
At the end of the day, though, banks should – and still do – have the right to set their rates as they see fit, competing for, in some places, a shrinking pool of buyers. The meltdown in the US was a cautionary tale, but our financial system is a far cry from being as corrupted as that one was, and while house prices have room to go down, panic that we’re on the cusp of a bursting bubble is, in my opinion, somewhat misplaced. Limit CMHC-backed mortgages to 25-year amortizations? Sure, sounds reasonable, and limits the government’s exposure. But let the lenders do their thing.
