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Canadians wait with baited breath for confirmation of the Royal Bank of Canada’s anticipated hikes in interest rates.
The national bank looks set to raise lending rates, which could cause debt-laden Canadians a bit of a financial headache. If it transpires, this move will be the country’s first interest rate increase in nearly seven years.
One sector that could be hit hardest by the potential rate rise is the mortgage market. The Bank of Canada has already increased interest rates on fixed-term contracts ahead of Wednesday’s announcement.
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These rises come at a time when house prices in Canada continue to soar, causing more and more people to be priced out of major cities like Toronto and Vancouver. But what can be done to prevent a crash in the housing market?
A well-known financial advisor and author has suggested a remedy that the insurance industry is bound to dislike.
“Get rid of the mortgage insurance business altogether,” Hilliard MacBeth told BuzzBuzzNews. “What mortgage insurance does is it allows the bank to not care if a loan is paid back. So, if you get rid of that then all of a sudden the bank has to care, the shareholders of the bank have to care, the executives of the bank have to care.”
Mortgage default insurance is a mandatory payment in Canada for down payments between 5% and 19.99%. It is there to protect lenders if a borrower stops paying and defaults on their mortgage loan.
Expert in Canadian real estate, MacBeth, said mortgage financing plays a huge role in house pricing and that getting rid of mortgage insurance would “make housing affordable again” and get the real estate market “back on track”.
“Banks have proven time and time again all across the world that — especially after long periods of no loan losses like we have now — they get complacent like everybody else does, and they lend more and more freely,” said MacBeth.
Scrapping mortgage insurance would reduce the chances of mortgage-related bailout, and home prices would start to decrease in line with the amount the banks would be willing to finance, according to MacBeth.
He told BuzzBuzzNews that any policymakers trying to make a “soft-landing” for when a housing crash occurs are wasting their time, because “either the bubble keeps growing or you have a crash”.
David D’Amour, director, Housing Finance Policy, and Kevin Wright, director, Homeowner Policy & Operations at Canada Mortgage and Housing Corporation (CMHC) said MacBeth’s call to scrap mortgage insurance was nonsense.
The pair told Insurance Business the industry is “very healthy” at the moment and that it maintains its value in the real estate process.
“Strictly speaking, MacBeth is correct in saying mortgage insurance isn’t there to protect borrowers,” said D’Amour. “It is a stabilizing influence and it protects banks in the event of a default on a mortgage loan. But the borrower does benefit from mortgage insurance as well.”
He went on to describe MacBeth’s comment on banks using mortgage insurance to allow them to “not care” if a loan is paid back as wide of the mark. “That kind of statement is bad for the banks – who do have a lot of responsibility,” D’Amour commented. “Banks have a responsibility to underwrite lines prudently. We all must by law.”
Neither men denied the current changes in the Canadian real estate market. Wright spoke of the “challenges” in some of the bigger cities like Toronto where home prices have undergone a considerable hike. The Ontario government recently applied rules intended to calm Toronto’s real estate market, where escalating prices have concerned policy-makers at municipal, provincial and federal levels.
“Lower construction rates actually slow the demand for borrowing,” added Wright. “The insurance space is getting smaller. We must continue to work in it in a controlled and responsible way.”
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