Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.
Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.
“There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said.
Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand.
Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,” Mr. Dodge said.
Even some former CMHC insiders are now calling for a radical rethinking of what the institution does.
Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,” including “an honest evaluation of CMHC’s relationship with our major financial institutions.” Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.
Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a recent interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.
But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep.
“The system as a whole is too big to fail,” he says.
“And when something is too big to fail, the government will come in.”
Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.
CMHC allowed the mis-pricing of the risk of lending capital, and this contributed to the massive speculative mania in Vancouver RE. Note how this opinion is now becoming mainstream.
By the time prices have crashed (in a year or three?) we’ll have certain individuals saying both “We all knew it was a bubble” and “Who could have possibly foreseen this?”, sometimes in the very same paragraph. Just watch.
Further point: As usual when markets go through one of these massive manias, policy rethink always happens after the fact, when the horse has long since bolted and the market is already looking after the problem.