Oliver Reaffirms Stance on Mortgage Rates

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)

  1. I have a better solution. Put a floor under Realtor fees. Make the commission to sell a house 10%, including the FSBOs. Why should just banks get to make artificial profits??

  2. Great point Homer!! How about stretching that artificial floor to include a minimum 1% commission for mortgage brokers? That eliminates the competition from online discount brokerages and rate buydowns. I would love the government to artificially inflate MY income. The banks are doing just fine; they don’t any more help.
    Just kidding, of course. Competition is great for all of us and especially for consumers.
    If the federal government wants to manipulate interest rates, they should focus on the incredibly high credit card rates. Bank oligopolies are ripping us off!! Inflation is 2%. Credit card rates should be wayyyyy down!! The feds should focus a on saving Canadians money; NOT on escalating the banks’ record multi-billion dollar profits.

  3. Beyond moronic that a supposedly conservative government is interfering in the free market. Completely against what this government would tell you they stand for.
    Thankfully Flaherty is gone. If he had stayed and continued his intervetions, the mortgage market would have been flattened, along with the housing market and eventually the economy.

  4. “We ride down the slippery slope of intervention” We are well down that slope…isn’t CMHC a form of intervention?
    I can hear the responses already…”but that’s good intervention”.

  5. No, CMHC is not an intervention, it a large finacial institution under the watchful eye of OSFI. An institution that has provided 18 billion dollars of profit back to the Canadian people over the past ten years.
    An example of a direct government intervention is the doubling of the land transfer tax by the City of Toronto. Oh yeah, almost forgot. Because the tax is detrimental to the real estate market, it merits no mention from the anti-real-estate crowd, Ben Rabidoux devotees and perma bears, who have been praying for a real estate crash forever.

  6. “Ottawa can easily let air out of the housing balloon with mortgage policy that doesn’t directly economically penalize every homeowner.”
    So far all attempts to re-regulate the mortgage industry has not been able to slowdown the market. What suggestions do you have regarding more regulation?

  7. Hi Frank:
    New regulation has meaningfully slowed the market, compared to what its pace would have been without that regulation.
    If the goal is to force a correction, there are any number of further measures that could be implemented: lower debt ratio limits, higher credit score requirements, bigger down payment requirements, qualifying conventionally at a 25-year amortization, creating higher qualification rates, and so on. It’s hard to know how much more regulatory weight the market can bear.
    Hi Reasonfirst:
    CMHC is not on a slippery slope. It’s involvement in housing is declining by the year.
    In contrast, by tolerating direct government mortgage rate manipulation we clear a path for public servants to violate other fundamental commercial liberties. Regulators might as well set a maximum mortgage size of $300,000. That would slow the market. Where does it end?

  8. Isn’t the CMB program, which is responsible for the funding of a large portion of small lender mortgage originations, which is exactly who pays brokers, government intervention? Are you advocating eliminating that?

  9. Hi Jim,
    There are plenty of examples of government intervention in the mortgage market, including the CMB. But the CMB doesn’t create a slippery slope. There’s a fundamental difference between a parliamentary-authorized program and a politician arbitrarily calling up a business, misusing his regulatory position, and coercing that business into increasing its prices to some subjective number. The danger that creates should be obvious.

Your email address will not be published. Required fields are marked *