The Canadian government has tightened mortgage regulations repeatedly, and two provinces have moved to tax non-resident homebuyers in the country’s hottest housing markets — and, well, home prices just keep on soaring.
So can anything stand in the way of fast-rising home prices and the role speculation is playing? Some, even big-bank economists, have suggested higher interest rates are the only way to go.
But a well known financial advisor and author has another idea, one the banks are a lot less likely to get behind.
“Get rid of the mortgage-insurance business altogether,” says Hilliard MacBeth in an interview with BuzzBuzzNews.
He notes that mortgage insurance isn’t there to protect borrowers. “See, what mortgage insurance does is it allows the bank to not care if the loan is paid back,” he says.
Generally, if homeowners can’t fork over a downpayment of at least 20 per cent, they need to make monthly mortgage-insurance payments.
“So if you get rid of that then all of a sudden the bank has to care, the shareholders of the bank have to care, the executives of the bank have to care, says MacBeth, who penned the 2014 book When the Bubble Bursts: Surviving the Canadian Real Estate Crash.
“Now all of a sudden they’re going to say, ‘Well, wait a minute, that bungalow in Toronto that’s priced at $1.1 million is a teardown? The most we’ll lend against that is $300,000,” he adds.
MacBeth is unequivocal when describing the role mortgage financing plays in real estate pricing.
“The secret about this whole thing that nobody’s figured out is prices are entirely driven by that amount of financing that’s available,” he says.
Scuttling the mortgage-insurance industry would “make housing affordable again” and get markets “back on track,” MacBeth adds.
Doing so wouldn’t rule out the need for a future bailing out of one or more of Canada’s biggest banks, however.
“Banks have proven time and time again all across the world that — especially after long periods of no loan losses like we have now — they get complacent like everybody else does, and they lend more and more freely,” says MacBeth.
But the chances of a mortgage-related bailout would decrease, and home prices should begin to reflect the lower amounts that banks — now with more skin in the game — would be willing to finance, MacBeth suggests.
Unsurprisingly, those banks would likely have something to say about such a step.
“The problem is the comeback from the banks is, well, if you do that, the cost in mortgages is going to go way up, the cost of interest rates on mortgages is going to go way up, and the housing market’s going to crash,” says MacBeth.
It’s an argument politicians heed because being in power during a housing crash likely forebodes a loss at the polls in the next election.
Therefore, he suggests, policymakers are trying to achieve a much-desired “soft landing,” a scenario MacBeth says isn’t possible at this stage in the game with buyers taking risks to enter a market with the belief that home prices will rise indefinitely.
“There’s no such thing as a soft landing. Either the bubble keeps growing or you have a crash.”