Positive move on consumer debt

After months of discussion on the dangers of Canada’s high level of consumer/household/private debt, the Government of Canada has decided to change policy. I was initially frightened by this prospect but when the dust settled I became reasonably pleased. The government has done three things to tackle household debt.

1. Reduce the government backing of mortgages and home equity lines of credit.

This is certainly a positive step. It partially removes the moral hazard that is currently infecting our banking system. Banks are free to lend with the knowledge that the government is baring part of the risk. By reducing (note not removing) government backing banks will be more cautious about long term lending.

2. The government will reduce the insurance that Crown Corporation Canada Mortgage and Housing Corporation offers to the lines of credit.

This is positive for much the same reason as the first step, and the two go very much hand in hand. It appears that the government’s strategy is to remove some of the artificial incentives that exist to borrow and lend. That is exactly the right strategy for the government to take.

3. Reducing the maximum amount that individuals can withdraw from refinancing their mortgages.

This is the only policy change that I have an objection to, but my objection is not so much the level that is allowed but the fact that this is regulated at all. Given that it is regulated, I don’t really know what level it is best to be regulated at (how could I and how could anyone?).

Overall I would say that the government is moving in the right direction in mortgage regulation. These are pretty tiny steps towards removing government interference, but any such steps should be applauded.

(It is unfortunate that the goal of these reforms is still being undermined by low interest rates set by the Bank of Canada.)