The curious case of Ottawa’s housing bubble backstop

OTTAWA—During the chaos of the United States’ financial collapse in 2008, the term “Too Big to Fail” rose to prominence as American authorities were forced to bail out major banks to avoid wider damage to the economy, even though Wall Street investment bankers had precipitated the crash. Canada’s government is giving this phrase a new twist in the post-COVID era as it takes the novel position that the overheated housing sector itself is too big to fail and needs to be insulated from rising risks as a decade of cheap credit comes to a sudden end. Riding the real estate bubble powered by historically low interest rates, Canadians have increasingly put their money into the speculative housing market rather than investments with the potential to produce the goods and services needed to underpin future prosperity. While housing continues to flourish, business investment in machinery and equipment, and intellectual property that fosters better economic productivity has not recovered after the pandemic. As a result, you have the Organisation for Economic Co-operation and Development predicting Canada is headed for the lowest per-capita GDP growth among its member nations. On top of that, Canadians have the highest level of household debt among G7 countries—most of it in real estate. Add in the inflation-fighting campaign by the Bank of Canada, that has seen its key interest rate go from almost nothing to the highest level in 22 years seemingly overnight, and you are looking at a potential foreclosure crisis with unknown liabilities for consumers as well as the financial system and the economy. Not to mention the political quicksand down the way as many thousands of mortgage holders face budget-busting increases in their monthly payments. To date, although there are signs of a credit crunch, delinquencies on mortgages have remained low. But Bank of Canada research shows that the percentage of homebuyers taking on highly leveraged and more risky mortgages has shot up in recent years. And as borrowers renew their mortgages, they face large increases in payments. Canadians with variable-rate mortgages based on variable payments have already seen their payments jump by nearly 50 per cent. And those holding variable-rate mortgages with fixed payments who renew in 2025 or 2026 will be hit with a 40 per cent increase. If a severe recession emerges, banks could face credit losses, leading to a vicious circle of tighter credit and economic deterioration. All this has led Ottawa’s banking regulators to take action. In particular, the Financial Consumer Agency of Canada (FCAC), which says two-thirds of mortgage holders report having trouble meeting their financial requirements, has put out new rules for federally regulated financial institutions. The rules sound demanding, but they mostly formalize the efforts banks have been often making on their own to smooth out the terms of at-risk mortgages to avoid delinquencies. It’s all about ensuring the “support that banks and other financial institutions should be providing to Canadians who are struggling with rising mortgage payments,” Finance Minister Chrystia Freeland explained. Of course, no one wants to see anyone lose their dwelling through a mortgage foreclosure, but the stepped-up protection for at-risk mortgage holders is a curious turn of events in a country that has gone hog wild on housing speculation. Ottawa is picking winners and losers here, the losers in this case being savers as opposed to borrowers. And, one way or another, the cost of helping mortgage holders avoid the pain of higher interest rates will be borne by all consumers as the banks pass the cost along. Another curious aspect is that FCAC always ties its new guidelines to helping “households.” But Bank of Canada research shows that more than one in five mortgaged home purchases are by investors, and the percentage of investor purchases has been increasing since the pandemic, inflating housing prices and pushing first-time buyers out of the market. Also, one doesn’t need an economics degree to observe that systemic measures to reduce the impact of higher interest rates on borrowers run counter to the very purpose of the higher interest rates generated by the central bank. The increased borrowing costs are meant to reduce recently record-high inflation by dampening economic demand, particularly in the irrepressible housing sector. The Bank in fact cited a resurgence of the housing price boom as a reason for its latest interest rate hike on July 12. So, as consumers are cushioned from the results of higher interest rates, it means the central bank may have to push rates higher or keep them high longer to take the inflationary steam out of the economy. Despite everything, Canadians still seem willing to buy into the housing gold rush, and the backstop from federal regulators is not likely to do much to head off continued speculative buying. But, both in humane and political terms, this support for mortgage holders is probably inevitable—another odd development in the wake of the pandemic that changed everything. Les Whittington is a regular columnist for The Hill Times. The Hill Times