Joe-OliverThe government controls our existence. It tells us how fast to drive, at what age we can drink, how much taxes we pay and so on.

But it should never have the power to arbitrarily compel law-aiding businesses to raise prices. When it does that, the results are bad. And that applies to mortgage rates as well, as Finance Minister Joe Oliver wisely understands.

On Wednesday Oliver told BNN:

“I don’t think it’s the role of government to set interest rates…for mortgages…We’re not intervening in the market directly or indirectly…We don’t believe there’s a major problem at this point…”

That was in response to an insurance company executive who suggested in the media that Canada artificially prop up mortgage rates.

“The old finance minister never would’ve allowed mortgage rates to go down,” Sun Life Global Investments’ Sadiq Adatia told Bloomberg. “He would’ve stepped up to do his part. The new one is more hands-off, and that’s actually a mistake.”

Adatia has a CFA. You’d think he knows something about economic principles and the risks of price floors. In the mortgage world, there are no shortage of dangers with rate floors. Among them:

  • Lenders are incentivized to push mortgage sales more, not less, because:

    a) They now have a higher profit margin (spread), and

    b) They’re battling lenders without federal price controls who can undercut them.

  • Overpricing mortgages redistributes wealth from consumers to lenders
    • Canadians who are forced to pay more: (a) incur more debt, thus adding to the debt problem; (b) retire later; and (c) become further disenfranchised with their government.
  • When businesses can’t compete on price they compete harder in other ways
    • The U.S. government’s Civil Aeronautics Board was a perfect example. Until the 1980s, it fixed airfares at artificially high levels. So airlines used non-price lures to attract customers, competing aggressively on in-flight amenities, food, empty seats and frequency of flights.
    • Banks employ some of the sharpest strategic thinkers in the mortgage business. They'll find a way to drive volume.
  • Underwriting quality potentially suffers
    • Banks have to maintain deal flow. If they’re prevented from openly competing on sub-3% mortgage rates (3% was the floor that the late Finance Minister Jim Flaherty supported), then there’s more incentive to approve fringe deals. That creates a different kind of risk.
  • We ride down the slippery slope of intervention
    • When citizens let government take away fundamental business freedoms (like price setting) without a fight, it’s a message to bureaucrats that they can transgress on other rights.

None of this is to say that policy-makers shouldn’t try to address housing overvaluation. They just need to control lending in less imperious ways.

Adatia opines: “You need rates to go up to slow down purchasing and for people to realize we’re in a rising interest rate environment.”

But you don’t. Ottawa can easily let air out of the housing balloon with mortgage policy that doesn’t directly economically penalize every homeowner. Thank goodness Mr. Oliver realizes that.


Robert McLister, CMT (email)