Canada’s economy on borrowed time

We cannot keep borrowing to fix a structural problem or to get out of every crisis

Canada Mortgage and Housing Corporation (CMHC) played a central role in Canada’s recovery from the 2007-2008 financial crisis. Now it’s playing the same role in Canada’s economic response to COVID-19.

This response may ultimately undermine the very goal CMHC is supposed to achieve, “to make housing affordable for everyone in Canada.”

Canada’s response to the Great Recession was a $125-billion Insured Mortgage Purchase Program (IMPP), buying mortgages from the banks through CMHC. It was similar to the Toxic Asset Relief Program (TARP) in the United States, but without the public scrutiny.

Combined with record-low interest rates the IMPP shored up the financial sector and allowed the banks to lend more money at a lower rate.

It worked — but at a cost to Canadians. The decade of cheap borrowing which followed the Great Recession means that Canada now has the highest level of household debt among OECD countries (almost all of which is the result of evergrowing mortgage debt according to Statistics Canada), a housing bubble, and 27 per cent of renters in core housing need, 90 per cent due to affordability issues.

In response to COVID-19, CMHC recently announced that the Government of Canada expanded its latest Insured Mortgage Purchase Program (IMPP) to $150 billion, up from $50 billion just a couple of weeks prior. Meanwhile, the Bank of Canada cut interest rates three times in a month to 0.25 per cent.

Canada’s economy is living on borrowed time.

The Conference Board of Canada predicts that 2.8 million Canadians will lose their jobs in the fallout from COVID-19 and unemployment will reach 14 per cent. Renters may not be able to afford to rent. Homeowners may not be able to afford their mortgage payments. If the housing bubble finally pops, they could find themselves under water.

For those who have it, default insurance, most of which is provided by CMHC, will cover their mortgage payments. But remember that default insurance protects the lender, not you. You could lose your home, but don’t worry, your lender will still get their pound of flesh.

Who is on the hook for all this? You are. CMHC is a Crown corporation, which means taxpayers are ultimately responsible for all the corporation’s guarantees. Plus, to facilitate competition, the government provides a 90 per cent backing on all guarantees provided by private mortgage insurers.

CMHC claims that it “exists for a single reason: to make housing affordable for everyone in Canada.” If that is the case, then it is failing. In reality, CMHC’s role has been to prop up the financial sector with state-backed guarantees, asset purchasing programs, and mortgage securitization. This is also important, but it shouldn’t come at the expense of the former.

Sure, give the banks another bailout, but let’s attach some strings. For starters, crack down on big banks which offer mortgage relief and then charge interest on deferred mortgage payments.

Better yet, let’s provide more support directly to Canadians. The COVID-19 Economic Response Plan doesn’t do enough to tackle housing need or the economic issues still lingering from the last financial crisis.

Long term, we need to address core housing need more directly. Encouraging cheap lending through low interest rates and state-backed guarantees on high ratio mortgages has failed to expand access to affordable housing.

We can’t keep borrowing our way out of crises.

Richard Beattie is an MA candidate in political science at the University of Waterloo where he is also the senior editor of the Political Science Graduate Student Association Journal, Inquiry & Insight. Prior to pursuing his MA Richard spent five years working in the financial sector. Contact: beattiera@gmail.com.