Nearly three weeks into our New Year’s resolutions to lose weight, Ottawa is riding to the rescue.
The weight in question won’t be found on any weigh scale or in how our suit pants fit, but two announcements on Jan.17th and 18th may affect the other “weight” many Canadians carry around.
One was the Bank of Canada’s announcement that it is keeping its overnight lending rate at 1.0% still near a record low and a continuation of very loose monetary policy.
In its subsequent report on the economy the next day, the Bank of Canada said that “The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth.”
Their concerns are still focused on the state of the U.S. economy, the high Canadian dollar, and the pace at which domestic demand will rise.
But by continuing to keep rates low (i.e., “accommodative”), the Bank of Canada is essentially encouraging Canadians to keep borrowing and spending. At the same time, the central bank’s governor, Mark Carney, has been warning Canadians of taking on too much debt.
At a time when average household debt is at a record 148% of household annual income, some finger wagging is probably warranted. But it does put the Bank in an awkward position.
It’s like bringing a tray of doughnuts to a Weight Watchers meeting and then tsk-tsking people for eating them. But the Bank of Canada got some help in playing Bad Cop when Federal Finance Minister Jim Flaherty announced rule changes to insured mortgages.
The changes include reducing the maximum life span of a mortgage from 35 to 30 years (and down from 40 years in 2009). This and a couple of other measures will basically make it harder for some Canadian home-buyers to get into the mortgage market – or, if they do get in, restrict how much mortgage debt they can take on.
Essentially, Mr. Flaherty replaced Mark Carney’s tray of doughnuts with a plate of low-fat carrot muffins, and slapped on some rules over who gets to eat them. The reality of the situation – but one that neither Mr. Carney nor Mr. Flaherty can talk about – is that there are two groups of Canadians:
one group is made up of individual households and businesses that are in great financial shape. Their debts are low or non-existent. Their income is secure and their assets are well-valued. They would have no problem taking on some debt and, in fact, could benefit by borrowing and investing in productive assets (like machinery and equipment).
The Bank of Canada, by keeping rates low, is essentially nudging this group to dip their cups into the Fountain of Debt and spend – because they are in no danger of getting into financial trouble.
But the other group is composed of households which, for various reasons, find themselves up to their eyeballs in debt. It could be mortgage debt, lines of credit, or credit card debt. For now, they are managing the debt servicing costs; personal bankruptcies in Canada are not at alarmingly high rates.
But when interest rates start to climb – as they are likely to this year – these spendthrift borrowers could be in trouble.
You only get to bring one plate of treats to the Weight Watchers meeting (in reality, bringing treats is probably discouraged or banned at a real meeting).
But it’s not socially acceptable to offer the thinner people a doughnut, and pass over the really hefty folks. So Mr. Carney’s tasty doughnuts (i.e., record low borrowing) have been replaced by not-quite-as-tasty low-fat muffins (i.e., restrictions on insured mortgage lending).
Minister Flaherty’s low-fat muffins are a pre-emptive strike. Despite some signs of cooling, Canada’s housing market has been amazingly resilient. We never did see the massive collapse of prices or housing starts that they’ve seen in places like Arizona or Nevada, and there is no credible threat of this happening.
Canada avoided a housing market crisis specifically because of its more prudent lending environment. The actions taken this week are just to ensure that borrowing remains in check.
Low-fat muffins aren’t as delicious as the doughnuts, and some potential homebuyers may find themselves shut out of the mortgage market altogether. But most Canadians are still in good shape, and a muffin or two won’t hurt them. And besides, muffins are better than a plate of celery sticks and a glass of water.
Todd Hirsch is Senior Economist with ATB Financial. His column is distributed through Troy Media.