In a speech given to the Economic Club of Canada in late April, Flaherty specifically noted that he would like to see "stability in the mortgage market and to maintain [his] government's goal of prudent lending practices." He further warned the banks not to succumb to pressures of competitive pricing in the marketplace or else they risk weakening Canada's fiscal position.
This advice is part of a larger effort on the part of the government to reduce the levels of household debt amongst Canadian families. According to data released by Statistics Canada in March, debt-to-income ratios in Canada had reached an all-time high, with the average Canadian household now owing $1.50 for every dollar earned. This is particularly concerning for the federal government, as too much debt held by individual households can have serious implications for the entire Canadian economy.
In response to this growing debt, Flaherty has taken a number of steps to bring down debt levels. One of his key measures was to impose stricter underwriting standards on mortgages. These rules included reducing the maximum amortization period from 30 to 25 years and disqualifying any potential borrowers who couldn’t demonstrate a credit score of at least 680 for government-backed insured mortgages. His recent advice to the banks to keep their rates up is designed to support these earlier initiatives and prevent households from taking on even more debt.
The measure is being welcomed by some stakeholders. Bank of Montreal chief executive officer Bill Downe argued that it was important for the banks to resist competitive pressures when setting their rates. He noted that “the importance of prudent credit underwriting practices, and the responsibility of holding borrowing capacity in check, cannot be overstated.”
However, there are some who question the efficacy of Flaherty’s advice. Chief among them is Mark Carney, Governor of the Bank of Canada, who argued that the best way to ensure financial stability would be to raise the Bank of Canada’s overnight rate. He argued that increasing the overnight rate would make it more expensive for Canadian banks to borrow money, which in turn would force them to raise interest rates on mortgages.
Although Carney has a point, Flaherty’s advice to the banks carries its own set of advantages. For one, by keeping mortgage rates high, the banks can ensure that Canadians continue to only take out mortgages they can actually afford. Second, the measure can help prevent a housing bubble from forming in certain areas of Canada, as has been seen in the past. Lastly, and perhaps most importantly, it can help ensure that Canada’s financial status remains strong, regardless of what is happening in the global economy.
Overall, Finance Minister Jim Flaherty is hoping that the banks will keep their interest rates on mortgages high in order to help Canadians save themselves from accumulating too much debt. This measure is in line with his larger goal of reducing household debt in Canada, as well as preventing a housing bubble from forming in certain areas of the country. Additionally, it may also help Canada maintain a strong financial position regardless of global economic trends. While some stakeholders have welcomed Flaherty’s advice, others, such as Mark Carney, Governor of the Bank of Canada, argue that increasing the Bank of Canada’s overnight rate may be the most effective way of ensuring financial stability.
In light of the increasing amount of household debt in Canada, Finance Minister Jim Flaherty has made it a priority to reduce debt levels and ensure financial stability. In late April, he urged Canadian banks to keep their mortgage interest rates up in order to protect Canadians from taking on too much debt. By keeping rates high, the banks can ensure that Canadians only take out mortgages they can actually afford, help prevent a housing bubble from forming, and maintain a healthy financial status for Canada. While some stakeholders have welcomed this advice, Governor Mark Carney of the Bank of Canada believes that increasing the Bank of Canada’s overnight rate would be a more effective measure. Despite this, the government is still hopeful that the banks will choose to accept Flaherty’s advice, as it carries with it numerous benefits for both the individual households and the overall economy.
This article was contributed on Sep 22, 2023
