Nero pointed out this article in the Globe and Mail about the Big Six Canadian banks urging the government to tighten up mortgage rules to control runaway speculation in the Canadian real estate market. Just to be clear, these are the same banks that are making pretty much risk free income from these government insured mortgages. About 40% of their loan portfolio is Canadian mortgages. As Nero says:
In what world do the banks have to tell the government to rein in lending and squeeze profits?
The article points out that the banks aren’t so much concerned about people defaulting on their mortgages (the government owns that risk), what they’re really concerned about is mass foreclosures affecting peoples ability to pay off their credit card bills and other loans, since THOSE debts are not government insured.
So these are the big banks, why don’t they just tighten up their own lending standards? Patriotz summed the issue up nicely:
The banks are essentially facing a prisoner’s dilemma problem. They know that if the bubble continues, and collapses, they all will be worse off. But there is no incentive for any individual bank to restrict lending, because its competitors would just take the business, and thus that bank would end taking the biggest hit.
Also an agreement among the banks to restrict lending, even if it could be arrived at, could be viewed legally as a conspiracy in restraint of trade.
So the banks must appeal to a higher level to restrict lending to all of them equally.
So will Flaherty listen to the banks and tighten up mortgage lending standards and if so, what form will that take? One point to remember is that this issue is about a national housing bubble, and I don’t believe there’s another major market in Canada that is as detached from local incomes as Vancouver.
update: Patriotz points out that Flaherty has made his decision, and somewhat sensibly decided to stick with the ‘warn them mildly and let them dig their own grave’ approach.
“In terms of Canada, we’ve been watching and monitoring carefully and we continue to do that. There are certain tools available to the government if we choose to use some or all of them. As you know, we did so in 2008, and we’re continuing to watch. Right now, there is no compelling evidence of a housing bubble in Canada. There are some signals in the market that are concerning,”
Mark Carney of the Bank of Canada feels the same way:
The central bank has no immediate worry about a housing bubble. However, Mr. Carney reiterated that households should be cautious about taking on home loans at current rates, which will inevitably rise.
“We’ve alerted to this issue, the broader issue of household debt,” Mr. Carney said. “We want to ensure people manage their affairs recognizing that the current situation with interest rates is extraordinary and extraordinary won’t persist.”
Both Mr. Carney and Mr. Flaherty have been urging consumers to act cautiously when buying homes for several months now.