Being overly indebted is as Canadian as hockey, maple syrup, and mortgage fraud. Naturally, a new poll from Abacus reveals debt costs may be the deciding factor in the next election. The poll found a third of people would change their vote and re-elect the Liberals for a cheaper mortgage. Talk about voting with their wallet, but is that even possible? If it were, does it improve or make affordability worse? Let’s dive into a simple question that may change the stability of housing and the economy.
A Third of Non-Liberal Voters Would Change Their Vote For Cheaper Mortgages
A lot of Canadians may be ready to vote for cheaper mortgages, according to this poll. A third (33%) of non-Liberal voters would consider changing their vote if rates fell. The share that would change their vote was higher for former Liberal (44%) and NDP (40%) voters. That’s a lot of votes considering just a third of Canadians have a mortgage.
It’s worth emphasizing these are just the non-Liberal voter in the next election. The same poll found over a quarter (26%) of voters plan to vote Liberal next election. Cheaper mortgages might be enough to swing the election back in their favor. However, a poll isn’t fact and it’s hard to get an accurate picture of 40 million people via a sample of just 2,000 people. Worth keeping in mind.
More Expensive Mortgages Would Attract A Small, But Interesting Demographic
Higher mortgage costs would only influence a small, but interesting, demographic. In total, about 1 in 10 Canadians (9%) would consider re-election with higher rates. This time former Liberal (7%) and NDP (3%) voters are underrepresented. The two demographics coming in lower than average potentially reveals an interesting insight.
That means more than 10 points of Conservative voters are less likely to vote Liberal. It’s not nearly as big of a share in favor of cheap mortgages, but it’s an important one. In some regions, politicians need to stop the opposition’s votes.
Can Governments Make Mortgages Cheaper?
More importantly, can governments even influence the cost of mortgage financing? Mortgage rates are generally based on government bond yields. Since credit markets are competitive, the cost is relative to demand for those bonds. Higher demand for bonds than supply means bidding up the price, leading to a lower yield. Borrowing costs fall as a result of lower yields that need to be paid for the capital.
What influences bond demand? The concept of relative demand is complex, so forgive me for sticking to high level concepts. In general, demand shifts for three reasons—attractiveness, supply, and artificial pressure.
Attractiveness is the appeal to domestic and international investors that provide capital. The more demand relative to the amount of debt issued, the lower yields fall. The US has served as a prime example of an attractive currency for decades. As the global reserve currency, it attracts investors during any economic turmoil. Low inflation and high liquidity make it a prime place to park cash, attracting a lot of capital. This helped drive low yields for the country for decades, as it was flooded with cheap credit.
Supply is an issue that is always relative to demand. It doesn’t matter how much is issued as bonds, but it needs to be lower than the persistent demand. As long as demand is greater than the country’s borrowing, yields will fall. Countries that borrow faster than markets can absorb tend to drive higher rates. In general, that’s why governments trim spending when times are good—so they can spend when times are bad. Ignoring that mantra is how most Western democracies got into the current mess.
Then there’s artificial demand—when the state stimulates its own demand for bonds. An example of this is quantitative ease (QE), where a central bank bids up bond prices. Borrowing costs fall and redistribute the liability across all currency holders as inflation. Don’t tell the Millennials that don’t have a home they just helped subsidize mortgages. They might be angry.
There’s also the issue previously mentioned—all credit markets are competitive. That doesn’t just mean in Canada, but right across the world. If yields fall too low or inflation rises too high, capital looks elsewhere. Ultimately that raises the medium to long-term costs of borrowing. Driving rates down seems like a good idea, until it results in higher rates for longer.
Now for the more important question—what do rates do and can a party actually impact them?
Do Cheaper Mortgages Help Affordability? Depends Who’s Asking
Different people are referencing different things when they say affordability. Some mean monthly payments, while others mean the sticker price and downpayment. Interest rates impact both of those in very different ways.
If a mortgage borrower already has a loan, lower rates can save them a ton of money. That should be obvious—a $500k loan at 5% interest costs more than the same loan at 2% interest. Falling rates help with affordability for existing borrowers. The money saved ideally flows back into the economy.
Buyers of their first home aren’t helped by lower rates. As the Bank of Canada (BoC) has pointed out, lower rates drove home prices much higher. Buyers don’t save money, but sellers capture the additional leverage. The central bank suggests that over the past 30 years, falling rates drove high prices. Higher rates reverse this pressure, but they need to be higher long enough for people not to assume it’s a blip.
The one that helps the economy the most is debatable, but a few points to consider. Despite the frenzy of a mortgage renewal “crisis,” it’s not as bad as presented. Credit report data shows the average monthly payment was still around $1,500 in Q2. That’s less than the average rent on a one-bedroom these days.
Mortgages are also 25 years in length, so the vast majority of borrowers pay much less. The impact is concentrated in recent homebuyers, who exhausted their leverage. That was primarily investors, who dominate new supply ownership. Canada’s largest bank also warned investors had displaced first-time buyers in their portfolio. An investor bailout designed as a shelter crisis solution. Brilliant.
Those not involved, especially policymakers, tend to see free cash flow as free cash flow. It’s all just money for the economy, but RBC disagrees. Their analysis found that older households spend the extra cash in ways less conducive to growth. As a result, they warn favoring older homeowners can deliver a permanent slow down to the country’s economy. Not quite the same.
So, the short answer is yes—it’s possible for a government to influence short-term mortgage costs. However, not without betting the entire economy and risking much higher costs later.