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[Tvt News]William Watson: Poloz wants more mortgage offerings? Then how about some real competition?

Financial Post readers got the skinny this week on who may replace Stephen Poloz as governor of the Bank of Canada when his seven-year term ends 13 months from now. That’s assuming, of course, that he doesn’t get a second term, which is certainly allowed, although it hasn’t happened since Gerald Bouey’s reappointment in 1980.

I don’t know what the inside view is in Ottawa — or, where it really counts, on the board of SNC-Lavalin. But Poloz hasn’t committed any firing offences and has generally been a clear communicator of the bank’s views. Unless a re-elected Liberal government feels it really must appoint a woman governor (“Because it’s 2020!,” you know) or a minority Conservative government wants to solidify its new-found electoral support in Quebec by promoting a francophone, there’s no obvious reason to change horses.

On the other hand, the Financial Post’s Kevin Carmichael has speculated that Poloz’s blue-skying last week about how Canada’s mortgage market could be re-made was don’t-give-a-hoot freewheeling of the kind you expect only from someone who’s nearing the end of his term and fully assumes school will soon be out for good.

In his mortgage talk, which came in a speech last Monday to the Winnipeg Chamber of Commerce and the Canadian Credit Union Association, Poloz’s main concern was how come almost half of Canadian mortgages are for five years with fixed rates. You can imagine why that would bother the head of a central bank. If 20 per cent of mortgages come due every year, the result could be undesirable lurches in the macroeconomic aggregates as sticker shock from higher rates forces consumers to cut back on other spending. It’s “simple math,” the governor says: “If all the mortgages were 10-year loans, only 10 per cent of these homeowners would renew every year.”

Or, he might have added: if all the mortgages were 50-year loans, only two per cent would renew every year, which would drive the risk from sticker shock about as low as it could go. But of course there are reasons why we don’t have 50-year mortgages at fixed rates. They would eliminate the risk of rate change for borrowers, but lenders might not be so happy carrying all the risk, while the interest rate they’d require to make up for it might well be prohibitive.

Poloz was an economist, and a good one, before he was a bank governor and that’s not something you lose, so he understands that market norms emerge from the balancing of costs and benefits, and incentives and disincentives, that aren’t always obvious to non-participants in the markets in question. On the other hand, he argues there hasn’t been a lot of change in Canadian mortgage markets “in my lifetime,” which makes them unlike most other markets, even many financial markets, which have undergone big changes in just the last couple of decades, never mind lifetimes.

So how come there has been a lack of innovation in an important financial sector in an era when innovation is the be-all and end-all of just about every business prophet and pundit? There are only two possible reasons: Government or oligopoly. Either something the government is doing biases the system to “five years fixed.” Or, for reasons of its own, Canada’s banking oligopoly — which is a word I’ve heard two past governors apply to the industry — likes the status quo.

We all love change, except when it comes to actually undergoing it. And if you’re not operating in an especially competitive environment, maybe you don’t really have to change. (On the other hand, standard theories of oligopoly suggest that when firms aren’t required to compete on price they often sublimate that competition into product differentiation and provide even greater variety than consumers may want. How come that hasn’t happened here?)

Government could be to blame if some or other regulation tilts mortgage-suppliers, whether intentionally or not, toward five years. In his mortgage musings, Poloz referred to laws dating from the 1800s that give consumers the right to repay after five years without penalty. It’s always nice to have another right, but you’ve got to wonder why the state needs to intervene between consenting adults who might decide instead to write a mortgage contract that either limited this right to eight years or 15 years or, moving in the other direction, made it absolute, allowing borrowers to pay off their loans any time they chose without penalty. You can imagine competitive banks offering a wide range of options — each with an interest rate appropriate to the risk the contract required them to assume.

If the problem is government, a reforming royal commission headed by a recently decommissioned Bank of Canada governor could help sweep away the offending regulations and their unintended consequences. But if the problem is oligopoly, exhortation even from the heights of the Bank of Canada is a poor substitute for open combat in markets.

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