The Federal government has tightened mortgage rules twice over the past 36 months and is still looking to reduce the amount of Canadian mortgage debt. The problem is that the mortgage market is well controlled and any further tightening runs the risk of stalling an already fragile economy. Rather than taking on the responsibility of further tightening, Ottawa has been encouraging the big banks to a) increase mortgage interest rates and b) tighten their own rules on mortgage approvals.
No self-respecting economist or government official would be caught dead encouraging monopolies or oligopolies from exerting their unfair advantage in the market place. Uh, until now. What’s currently being encouraged is price fixing at an inflated level. The government sees this as a win as it will discourage some Canadians from borrowing while preventing others from qualifying at all. And the banks are happy to play along, because if they can all agree to an inflated price then the extra mortgage interest collected goes straight to their bottom line.
Tighter lending guidelines is not a better option. Again the federal government would be happy if the banks would take the hot potato on this one. Tighter rules mean less credit available to Canadian homeowners. What makes them think that this is a good idea, if it’s not a good idea for CMHC to impose these rules? And the banks position? Well if they start to cherry pick the least risky loans then their already extremely low default rate would creep close to the zero mark. That’s a lot fewer loans to write off, and that will once again flow straight through to their bottom line.
Ottawa needs to keep its nose out of the banking business and let the markets dictate price. If anything they should be preventing collusion and unfair business practices, not encouraging it.