Economist warns of ‘unintended consequences’ of mortgage charter

The charter could aggravate current housing market woes, says expert

Economist warns of ‘unintended consequences’ of mortgage charter

Relief for financially burdened homeowners that the Liberal government has promised in its latest fiscal update could instead prolong the already overheated housing market and even lead to higher rates for longer, according to economist David Rosenberg.

Earlier this week, the federal government announced a new Canadian mortgage charter in its fall economic statement. The charter outlines the expectations for the country’s banks when it comes to providing financial relief options for Canadians.

The charter was drafted with the intention of ensuring that “Canadians have access to the tailored mortgage relief they need at a time of higher interest rates,” the federal government said.

Deputy prime minister and finance minister Chrystia Freeland added that the charter is “one of the most important things” in the fiscal update.

“I really recognize that with interest rates having gone up very quickly, there are many, many Canadians who are concerned about their mortgages going up,” Freeland said. “They are concerned about being able to afford to stay in their own homes. What we’re saying … is we understand this is a challenging situation and we are here to help.”

However, Rosenberg argued that the measure is running a significant risk of “creating perverse incentives and unintended consequences in a sector deeply in need of correction” – in turn aggravating current housing market woes, as well as applying upward pressure on interest rates.

Relief policies amplify the risk of “prolonging the correction in the housing market and favour(s) existing mortgage holders remaining overextended at new buyers’ expense,” he wrote in recent note to clients of Rosenberg Research & Associates Inc.

The trend could then “potentially force the Bank of Canada to keep its policy stance tighter than desired,” Rosenberg warned.