Does Trudeau’s government worry about Canadian household indebtedness?

Overshadowed by the Brussels attacks and the death of former Toronto mayor Rob Ford which both took place the same day, Bill Morneau’s first budget, unveiled on March 22^nd, is also deserving of our attention. It gives us a better idea of what the country might expect under Liberal rule.

I turned my attention to Chapter 8, entitled “Tax Fairness and a Strong Financial Sector,” in which there is talk of “Strengthening the Financial Sector to Support Economic Growth.” The government hopes, among other things, to make the financial sector even more resilient, to better protect consumers, and to limit risks to the financial system. To do so, it is intent notably on “Studying Housing and Household Indebtedness.”

For a few years, a number of analysts have been worrying about the Canadian housing market. They see the steep rise in house prices and the household indebtedness they increase as important risk factors that could affect the stability of the country’s economy. In cities like Vancouver or Toronto, in which the hike has been swift, the Bank of Canada (see its latest Financial System Review, or FSR) and others are wondering whether real estate speculation might be fuelled by the non-resident buyers.

However, these are only suppositions and, as the budget documents assert, “a comprehensive and reliable data set on the number of homes sold to foreign homebuyers does not exist.” The government therefore allocates “$500,000 to Statistics Canada in 2016–17 to develop methods for gathering data on purchases of Canadian housing by foreign homebuyers.” The initiative is, without a doubt, interesting and relevant.

Moreover, $13.5 million over five years are also allotted to Statistics Canada “to enhance the quality and timeliness of economic and financial data to support domestic and international financial stability.” There you have another very praiseworthy initiative.

These initiatives nonetheless contrast heavily with the role the government itself plays, through the Canada Mortgage and Housing Corporation (CMHC), in overheating the housing market. Indeed, the CMHC allows mortgage-credit issuers such as banks to securitize their clients’ debts (i.e. to transform these debts into assets that can be sold to a third-party investor). It can also sell mortgage bonds to these institutions, another type of asset that generates revenue, to fund their mortgage loan operations.

Without getting into too much detail, all you need to understand is that securitization increases the financial institutions’ capacity to grant mortgage loans so that people can buy houses. It’s great news for those who want to become home owners, but it also encourages banks to issue loans to financially worse off customers. Case in point: the 2008 financial and economic crisis was triggered when a housing bubble went bust. The bubble had been mainly fuelled by securitization (see or read The Big Short).

The Bank of Canada acknowledges that, “[w]hile there were clearly other important factors at play, public securitization in Canada helped support growth in mortgage credit during this period” (p. 44 of the FSR). In Canada, mortgage credit increased an average 6% each year between 2008 and 2014 while it fell 2% in the United States over the same period, with the obvious consequences that we are now witnessing: “An increase in mortgage credit could lead to more leveraged households and elevated house prices” (p. 46).

We cannot claim that Ottawa is insensitive to the risks to Canadian households’ financial situation and to the stability of the Canadian economy in general. The initiatives put forth in the budget are proof of the contrary. However, it is also undeniable that the CMHC contributes to the country’s growing household indebtedness through its securitization program, which feeds, be it just in part, the overheating of the housing market.

We are therefore tempted to believe that Justin Trudeau’s government is hoping to guarantee financial institutions a stable business climate instead of structurally reducing households’ heavy reliance on credit. In other words, the priority, as usual, is not so much that households get into less debt, but that they get into better debt.

Julia Posca is a researcher with IRIS, a Montreal-based progressive think tank.