OTTAWAConfronting an economic crunch created by the subprime-mortgage meltdown in the United States, Bank of Canada Governor Mark Carney says he's worried about the increasing popularity of the 40-year mortgage in Canada.
"We have concerns with the increased prevalence of very high loan to value mortgage products," he told members of Parliament on the House of Commons finance committee yesterday.
"They add to momentum in the housing market and, if everyone has a 40-year amortization mortgage, then you just have higher housing prices."
More than half of first-time buyers are said to be choosing to stretch their mortgage payments over 30 to 40 years, rather than the usual 25, for a better house than the buyers could otherwise afford.
Carney stressed, nevertheless, that Canada is not facing the same risks set in motion by subprime mortgages south of the border.
"The structure of our housing finance is entirely different than that of the United States," he said, adding that the creation and bust of a housing-price balloon based on risky mortgages is not possible to the same extent in Canada. Although housing prices have risen aggressively in Canada, Carney said, the country still has the lowest housing affordability among 20 industrialized nations checked by the International Monetary Fund, alongside Austria. Carney also said the Bank of Canada is being forced to cut its trend-setting rates more than it might otherwise because commercial banks are reluctant to pass on the savings to borrowers.
Despite sharp decreases in the central bank's trend-setting overnight rate, the interest rates charged by banks on some loans, particularly five-year fixed-rate mortgages, have not declined accordingly.
Carney said the turmoil in credit markets means commercial lenders are paying more to borrow money themselves and feel they need to recover some of those costs from customers.
"In calibrating monetary policy, we are taking that into account," Carney told MPs.
The issue, which the governor flagged as very important, tends to weaken the ability of the central bank to use interest rates to boost economic growth.
Reacting last week to the struggling Canadian economy, Carney lowered the overnight rate to 3 per cent from 3.5 per cent. It was the second time in two months he has chopped the rate half a percentage point. And Carney has said more stimulus from the central bank may be needed as Canada is dragged down by the sputtering United States economy.
Asked about the loss of jobs in automaking and other manufacturing industries, Carney said a "very difficult" adjustment is going on in Canada.
He said 360,000, or 16 per cent, of Canada's manufacturing jobs have disappeared in the past five years. Over the same period, however, the economy has created 1.8 million jobs in the service sector and non-manufacturing goods-producing industries.
"The nature of manufacturing is changing," Carney observed, noting that people can hope the outcome will be more valuable jobs if they must be fewer.