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Someone in Ottawa is Getting Nervous

OttawaWe all read the news, including a certain someone who happens to have influence on Canadian mortgage regulations. Here’s what he might have been reading the past few days:

The Department of Finance has been trying to manage a “soft landing” in housing, but realty soothsayer Phil Soper sums up the market like this: “We expect no landing, no slowdown, and no correction in the near-term.” (Post article)

Do you get the sense that four rounds of mortgage rules are not moderating home values like mortgage deity, Jim Flaherty, expected?

And now he’s got another thing to worry about: potentially lower interest rates, which fuel debt accumulation.

In no uncertain terms, Bank of Canada boss Stephen Poloz is telling Canadians he’s “worried” about inflation falling too low. When the BoC says that in public, bet on rates not rising for several months. In fact, trader types are now pricing a reasonable chance of a rate cut.


(Click to enlarge)

This Bloomberg data shows a 48% implied probability of a rate cut by October, based on overnight index swap (OIS) prices. We haven’t seen the odds this high in a while.

This all comes as Canada just laid an egg in employment, losing an unforeseen 46,000 jobs in December. In the last six months, the country has created just 3,400 jobs a month on average, for a population of 35 million!

The key U.S. jobs report also disappointed today.

(Note: If you had to choose just one indicator to divine rates, employment would be it—albeit it’s very volatile.)

So this brings us back to the man behind the big desk at Finance. Knowing that housing is firing on most cylinders, knowing that the BoC has an easing bias, knowing that rates can’t be expected to moderate consumer debt levels, what does he do?

jim_flahertyIn recent months Flaherty has affirmed that:

“…We have no plans for further (mortgage rule) action at this time…”

But he’s also been reiterating this statement more often, as he did on CTV this weekend:

“We’ve tightened the rules four times on mortgage insurance and if we have to tighten them again, we will.”

If housing stays hot and the BoC starts telegraphing lower rates, you can probably translate this statement as: “We will.”

Sidebar: Quebec has been one of the more vocal provinces speaking out against further mortgage rule tightening, at least on a national basis. In November, its Finance Minister Nicolas Marceau issued this warning to Ottawa: “I suggest that Mr. Flaherty avoid implementing pan-Canadian policies that could negatively affect certain markets…Further tightening of mortgage rules could have adverse consequences on the market and on Québec’s economy.”

Rob McLister, CMT