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Canadian Government Overexposed To Housing Market, Bank of Canada Official Warns

An article from the Globe and Mail by Michael Babad

The Canadian government is now too “exposed” to the country’s hot housing market, warns a top central bank official who’s calling for more private-sector involvement.

Lawrence Schembri isn’t the first official to warn how dangerous this could be.

But his paper, published today, is notable in that it comes from a deputy governor of the Bank of Canada, which only recently again cited the threats from the massive debt loads of Canadian households.

Mr. Schembri stresses that the system is sound, as long as there’s no “severe” shock that would drive up unemployment, and that the “imbalances” among consumers will probably ease as mortgage rates inevitably rise.

Nonetheless, he writes in the National Institute Economic Review, things have to change given, among other things, debt-to-income levels that have been at or near record levels in Canada.

“These post-crisis imbalances have accelerated a trend in which the government has become more exposed to the Canadian housing market via its guarantees on mortgage insurance mortgage securitization,” Mr. Schembri writes in the journal published by Britain’s National Institute of Economic and Social Research.

“This trend is not sustainable,” he adds.

“The housing finance framework needs to be adjusted and strengthened by rebalancing the risk exposures among the participants in this market.”

Canada Mortgage and Housing Corp., the government insurer, is, of course, a key player here, while the mortgage market is dominated by the big banks.

The government has taken several steps to cool the market over the past several years.

“However, more work is needed to determine the appropriate adjustments in the pricing of, and quantitative restrictions on, mortgage insurance and securitization to create the right incentives, leverage market forces and achieve a sustainable rebalancing in risk exposures,” Mr. Schembri says.

“In particular, measures should be considered to develop a liquid private-label securitization market in Canada.”

Under the former governor, Mark Carney, the Bank of Canada warned frequently of the dangers to consumers, even threatening a rate hike should households not take steps.

The current governor, Stephen Poloz, has dropped that, though the central bank’s latest monetary policy report again highlighted the risks.

Indeed, the Bank of Canada had, until recently, said the country’s housing market appeared headed for a soft landing.

But in its latest missive, it said the eastern Canadian market was looking that way, while Ontario, Alberta and British Columbia were still running strong.

For the record, the central bank wasn’t saying those markets were in danger of crashing, but observers took it as a warning where Toronto, Calgary and Vancouver were concerned.

And Mr. Schembri returns to this theme today.

“Much of this strength in house-price growth is coming from the greater Vancouver and Toronto areas – which are popular destinations for immigrants and also, based on anecdotal evidence, for foreign investors – and from Calgary, which is benefiting from strong income growth due to high energy prices and elevated levels of economic activity,” he writes.