CMHC guarantee on mortgage insurance putting taxpayers at risk, says OECD
OTTAWA — The federal government needs to limit the percentage of a mortgage loan it is willing to insure against default in order to protect taxpayers if the overheated housing market goes bust, according to a new report on Canada by a major international think-tank.
In the first major survey of the Canadian economy in two years, the Organization for Economic Co-Operation and Development takes particular aim at risks in the housing market, while also chiding the country’s environmental record, the oilsands and skills training.
The report — which contains a dedication to the late finance minister Jim Flaherty from the group’s secretary general, Angel Gurria — is mostly complementary about the state of the Canadian economy despite raising a number of issues, including growing inequality.
But it takes special aim at the housing market, taking note of elevated prices, increasing unaffordability in certain big cities like Vancouver and high household debt, which leaves families vulnerable to interest rate hikes.
Given such risks, the OECD wonders why the government allows Canada Mortgage and Housing Corp. to insure 100 per cent of high-leverage mortgages when most other countries limit potential losses to 10 to 30 per cent of outstanding balances in most countries.
“Extensive government involvement in mortgage insurance exposes taxpayers to more risk than is necessary for ensuring a liquid and efficient market,” the report states.
“Imposing a deductible on mortgage insurance, as is common in other lines of insurance, would help promote stability by better aligning the interests of the lenders and those of the insurer, thereby reducing moral hazard. Over the longer run the insurance activities of CMHC could be privatized, shifting the government’s role to one of guaranteeing only against catastrophic losses.”
Former finance minister Flaherty had also speculated about privatizing the Crown corporation, and Ottawa has taken steps to rein in its activities, including the most recent announcement that it would no longer insure condominium construction. It has also dropped insurance on second homes.
One danger of the government-backed safety net is that lending standards are reduced since banks are protected against default.
Finance Minister Joe Oliver has come under pressure to intervene in the market after recent moves by Canadian banks than have taken five-year fixed rates below three per cent, but speaking in New York the minister downplayed the danger. He said rates had not come down very much.
“We don’t believe there is a major problem,” he said.
The wide-ranging report analyses most economic and fiscal issues facing the country and expresses concern over the lack of skilled workers for some sectors in some regions, particularly resource-rich Alberta and Saskatchewan.
In a separate paper, the OECD says federal and provincial governments must co-operate with local authorities and schools in educating and training Canadians for the jobs that are in demand.
“Skills shortages in certain fields and regions could limit growth going forward,” it warns, adding that the average apprenticeship completion rate was only 50 per cent between 2000 and 2011.
The report is also critical of Canada’s environmental record, calling the expansion of the oilsands in Alberta the principal reason the country won’t come close to meeting its 2020 target on reduction of greenhouse gas emissions.
“The main reason is that expanded oilsands production in Alberta is projected to push oil and gas emissions 23 per cent higher by 2020, completely offsetting improvements in the electricity sector through the phasing out of coal-fired power generation,” it says.
“In addition, Alberta’s current emissions targets are less stringent than national commitments.”
It recommends that Canada increase the pricing on carbon emissions, noting that currently it has one of the lowest effective tax rates on carbon among industrialized countries.
Generally, the OECD says Canada’s economy is doing relatively well with expected growth rates of 2.5 per cent this year and 2.7 per cent in 2015.
But it warns that inequality is rising and that housing in some large cities, such as Vancouver, has become too expensive for many.