A basic principle of good governance in Canada is that governments set mandates for crown corporations and regulatory authorities and those arm’s-length institutions then make use of the tools at their disposal to design actual policies. This principle is under threat on the campaign trail as politicians weigh in on one of the issues voters care most about these days, housing affordability.
All parties have put out ideas and plans for taming Canada’s housing markets. They all acknowledge the need to increase supply — which at the end of the day is the only real long-term fix — while trying to free up extra cash for people to make a down payment on a home in their desired neighbourhood. But in the blizzard of proposals there are worrisome signs that whoever runs the next government will interfere with the day-to-day operations of agencies that are supposed to operate at arm’s length.
Examples include proposals to: cut the Canada Mortgage and Housing Corporation’s (CMHC’s) insurance premium by 25 per cent, ease stress tests required by the Office of the Superintendent of Financial Institutions (OSFI) for homeowners to qualify for a mortgage and raise the maximum amount of a mortgage that can be covered by mortgage default insurance. All such measures should be left to decision-makers at the relevant institutions. That’s what they are there for.
OSFI has a mandate to ensure the stability of the Canadian financial system. Its stress tests on uninsured mortgages are meant to protect federally regulated financial institutions from taking on too much risk. Mortgages make up a large part of the major banks’ loan portfolios. Mortgage credit is a majority of household credit and about one-third of all lending by the financial sector. As a result, mortgage lending can pose a considerable risk to financial stability. Like other issues surrounding financial stability, it is best left to policy experts at OSFI to control.
As for CMHC, it has a mandate to help Canadians access affordable housing options. An important part of its strategy is to insure high-risk mortgages through mortgage default insurance. Like other insurance companies, it limits the risk it takes on by proscribing the types of mortgages that can be insured and by setting insurance premiums that protect its capital. In recent decades, CMHC has increased its reserves and the premiums it charges so as to ensure its soundness in the event of a big housing downturn. It is hard to understand how elected officials might conclude they are better placed to determine what insurance premium CMHC should charge in order to achieve the best balance between affordability and stability. And remember: any increase in risk on CMHC’s balance sheet is an increase in risk for taxpayers.
The parties also propose different measures to increase the supply of housing. But building homes is a slow process and in the short run demand-side measures will mainly fuel house-price inflation. We can debate each set of proposals, but what is truly missing is a serious debate about the goals of a national housing policy. Does affordability mean every Canadian should own their own home? Does it mean housing needs to be subsidized for everyone or only for those with low incomes? These are the questions that should be discussed on the campaign trail, rather than measures that directly interfere with the operations of CMHC and OSFI. Such interference puts taxpayers at risk and sets a dangerous precedent for other Crown corporations. How many of us would be comfortable if the minister of finance were dictating to the Bank of Canada what its policy rate should be?
Out on the campaign trail our politicians should discuss the housing crisis and the goals of housing policy in general terms but leave the details of policy design to the experts at CMHC and OSFI.
Jeremy M. Kronick is Associate Director of Research at the C.D. Howe Institute, where Thorsten Koeppl, a Professor of Economics at Queen’s University, is a Scholar in Financial Services and Monetary Policy.
