Photo: Michel Filion/Flickr
The housing finance market in Canada is unsustainable and needs more competition, according to a report published this week by the Bank of Canada’s deputy governor.
While the Canadian housing finance system withstood a sharp drop in liquidity and house prices spurred by the global financial crisis, Lawrence Schembri believes imbalances in the housing market have since arisen that expose the government and, inevitably, Canadian taxpayers to too much risk.
One notable suggestion Schembri makes to rebalance the market is to transition the framework away from government and towards the competitive private sector.
“Given the dominance of a small number of large banks in the Canadian housing finance market, there is also a desire to promote competition within this market by helping to ensure that smaller financial institutions can get adequate funding to remain active market participants,” he said in the report, which was published by the National Institute of Economic and Social Research, a British think tank.
The Canada Mortgage and Housing Corporation (CMHC), a Canadian government Crown corporation, guarantees the majority of mortgages in Canada. In the past, the Bank of Canada has expressed concern over “overheated” markets in Toronto and Vancouver, though they’ve never described it as a bubble. While many economists do not believe that a bubble exists in the Canadian housing market, the government would be on the hook if there was ever a significant downturn.
Although some measures have already been taken to manage risk exposure — the government has put limits on publicly guaranteed mortgage insurance and the CMHC has raised insurance premiums and reduced the range of mortgage insurance products it offers — Schembri says more action needs to be taken to sustain the market, particularly the development of a liquid private-label securitisation market, which Canada has never had.
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