February 17, 2010

Opposite Directions on Homeowner Debt

It is not uncommon for the provinces and the federal government to move in opposite directions on matters of public policy, particularly in regards to fiscal stimulus. Yet another example of that opposite movement is revealed in the Campbell government's announcement of deferred property taxes for anyone with children under age 18 at the same time that the Harper government takes steps to rein in debt for homeowners.

The Harper government took relatively mild steps by:

• Requiring that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
• Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Requiring a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

The federal government could have increased the minimum down payment for all home purchases and decreased the amortization period for mortgages. Strong steps like that could slow down the economic recovery, but it is important to remember that the worldwide economic collapse was largely due to a housing bubble built on unsound lending practices. Finance Minister Jim Flaherty deserves credit for taking reasonable steps to prevent the development of a Canadian housing bubble.

The changes the Campbell government, announced in the February 9th Throne Speech, will have the opposite effect. Campbell is encouraging those who can least afford it to go deeper into debt, as a claim of the government on the debtor's home for deferred taxes.

Perhaps Jim Flaherty and Colin Hansen should have a close chat about something other than the HST.

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