Newton and Mortgage rates

"For every action there is an equal and opposite reaction", so says Issac Newton in his third law of motion and so Jim Flaherty Federal Finance Minister hopes.  With the federal government fearful of what they see as an overheated housing market in Canada, Flaherty has taken a number of steps to interfere in the market in the hopes he can slow down Canadian homeowners and buyers reckless desire to own a nice home to live and prosper in.  The latest (and if you believe the Right Honorable Minister this time, the last) bit of meddling was the cap on amount of high ratio mortgages that the federal government would insure through CMHC.  Effectively telling the banks that if they want to lend more, then they will have to take on the risk themselves.

Banks, agonizing over the fact that this would mean a potential loss of millions of dollars in profits - perhaps a couple of percentage points off the hundreds of millions they annually make - see their only option as offloading the loss onto Canadians through higher interest rates, after all why should they have any risk when they lend money to anybody, especially when there are so many eager Canadians who dream of putting a roof over their families head!

Look, is it realistic to expect that the historically low interest rates that we have seen the past few years will stay there?  Of course not, interest rates are going to go up and in fact if you look at the long term rates offered by the banks this year you will notice that they have yo-yoed up and down all year.  Homeowners have got to expect and be prepared for rates in the 5% range at some point soon (HINT - pay attention to the prime lending rate NOT the long term rates offered by banks; when this starts to rise, that signals that the lending days of wine and roses are coming to an end).  What really frosts my cookies is the holier than thou attitude that the Minister and the powers that be take when they look at the housing market, they try and look at it as a national organism rather than regional animal. To use national numbers to point to an 8.4% year over year rise in house prices or a 9.4% increase in the number of transactions is more a reaction to the large market impact of the larger metropolitan markets like Toronto or Vancouver which have a disproportionate impact on the numbers than it is to  national explosion of an out of control housing market.  For the most part, as CREA (Canadian Real Estate Association) points out here, the country as a whole is impacted by a few heated markets, and in fact, had just started to see gains from the last federal interference in the housing market.

So what is my long and rambling point?  The recent angst and dismay over the latest announcement of interest rate hikes is a red herring and focuses attention in the wrong direction.  We ought to be spending more time asking why the federal government keeps creating policies that are aimed at telling Canadians what is good for them and then coming back with a new and even "better" idea.  The Right Honorable Minister has to start letting Canadians decide what is good for them and stop treating them as if they are heroin addicts in a poppy processing plant.  Karma, much like Newton's 3rd law, can have an equal and opposite reaction, so with all the attempts to slow down the Canadian real estate market, the Minister might get what he wishes for in spades.