Canada's Housing Affordability Challenges

By Promit Mukherjee
OTTAWA, Nov 6

Canada's housing affordability cannot be resolved by changing the country's unique mortgage structure, the Bank of Canada's Senior Deputy Governor said on Wednesday, as a wave of mortgage renewals over the next two years threaten to hurt the economy.

"Improved housing affordability requires a better balance between supply and demand, and achieving this balance will take time," Carolyn Rogers (NYSE:ROG) said in Toronto in an address on the country's mortgage market.

The country's mortgage structure has largely helped in maintaining financial stability and access to affordable credit, keeping its mortgage default among the lowest in advanced economies, she said.

Canadian mortgages are either variable rate or fixed rate, which is adjustable after every four or five years, making homeowners vulnerable to changes in interest rates. By contrast, the structure in the U.S. is usually a 30-year fixed rate.

Rogers noted that over four million, or about 60% of all outstanding mortgages, will be renewed over the next two years, and a bulk of those will face a significant increase in their payments, despite interest rate cuts.

The BoC has reduced its key interest rate four times in a row to 3.75% to spur growth after inflation returned to its 1%-3% control range. However, economists have said that despite the cuts, mortgage renewals will be at a much higher rate as the prevalent five-year mortgages are linked to long-term bond yields, which have not decreased much.

"Higher payments (on mortgages) could cause households to pull back on spending by more than we expect," she said.

"Widespread losses in the mortgage market could also have implications for market liquidity and overall financial stability," she added.

Changing the mortgage structure from a shorter length, such as four or five years, to a 10-year one will require policy changes, but many ways the current structure helps discourage too much leverage.

"We need to resist the temptation to try to solve the housing affordability challenge by tinkering too much with the mortgage market," Rogers said.

Reporting by Promit Mukherjee; Editing by Dale Smith
(proimt.mukherjee@tr.com)