Finance Committee on Feb. 12th, 2013

[Mark Carney]

Yes. The expectation at the time of the mortgage insurers was that this would be a niche product and that the underwriting standards would be consistent with a 25-year amortization mortgage. In other words, the individuals who qualified for a 40-year-long amortization mortgage would also have qualified for a 25-year amortization mortgage.

By and large, that second bit has been true. So I would contrast the subprime component of the American market on the eve of their crisis with a very low “subprime” component of the Canadian mortgage stock as it stands—

[Scott Brison, Liberal, Kings—Hants, NS]

[Inaudible—Editor]...half the mortgages issued in 2000 and in the first half.... That's not a niche product, the way it turned out.

[Mark Carney]

That was the point I was going to make. But it was not a niche product; it became the norm as a consequence of that.

I think what happened here, quite frankly, is that the long amortization and an expectation of lower interest rates for longer combined for people to forget the fact that mortgages are going to reprice every five years, even if they have a fixed-rate mortgage, and contributed to those...let's say roughly half the mortgages' long amortization, which is why it was necessary for the government to tighten these.

[Scott Brison, Liberal, Kings—Hants, NS]

Sure, and you expressed support for that decision to tighten, but what about the decision to loosen them in the first place? You must have an opinion on that as well.

[Mark Carney]

Hindsight is always 20/20, Mr. Brison.

[Scott Brison, Liberal, Kings—Hants, NS]

On consumer debt, the bank is expecting personal debt to moderate, yet last month we saw non-mortgage consumer debt at a record high, I think $27,000, with total personal debt at $1.67 for every dollar of income. The trend line isn't going in the direction you're describing.

You, to your credit, have been warning Canadian families about this since 2008-09, but they don't seem to be listening.

[Mark Carney]

Well, I actually think they—

[Scott Brison, Liberal, Kings—Hants, NS]

Why do you think it's going to moderate?

[Mark Carney]

I think Canadians are listening, actually, and if you look at the chart you referenced, on page 20, in English, you see the blue line particularly, which is the year-on-year growth of total household debt—mortgages and including consumer and credit card debt—and that has fallen to just over 3% on a year-on-year basis, which is just above the growth of disposable income.

I said in my opening statement that we expect the household debt ratio to stabilize around current levels. It's a reasonable prospect that this year, in the coming quarters, actually, we will see a stabilization of the household debt ratio. Obviously, we're watching this very closely. You're watching this closely. This is one of the reasons why we see a more “constructive” evolution of the imbalances in the household sector and have adjusted our guidance on interest rates.

[The Chair, Conservative, James Rajotte]

A last brief question, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Or creative destruction, depending on how you look at it.

You referenced some of the sizable spillover effects of the weakening of the housing sector. How severe could these spillover effects be, and what could be some of those spillover effects for the Canadian economy?

[Mark Carney]

Well, the downside risks are several-fold, and it's one of the downside risks we've highlighted for a number of reports for our outlook on inflation.

Chair, I don't know if I have time to give a full answer to this, but they would go to the direct issues around construction. They would go to the use of home equity withdrawal to support consumption. There would be less through the balance sheets of the banks. But I'll stop there, and then if others want to follow up, I can expand.

[The Chair, Conservative, James Rajotte]

Okay.

Thank you, Mr. Brison.

Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

Thank you very much for coming today, both of you.

First of all, I have to say thank you, Mr. Carney, for all your hard work and for what you've done for the Canadian people and the Canadian economy over the last few years. I wanted to tell you that I've been very impressed with that, and this might be my last opportunity to do so.

I want to talk about two risks to the Canadian economy. I think there's a significant connection and correlation between them. Most of these issues I think are primarily in Alberta, but they affect the whole country.

First, I'd like to talk about labour and the CIBC's December report. It was talking about high-demand positions and how they're going unfilled, and it said that lower-skilled workers continue to be unemployed. I think the saying from the report was “people without jobs and jobs without people”. What is that in terms of a threat to the Canadian economy?

Second is pipeline capacity. I've brought this up to you before, but I want to know what you believe at this stage, given what's happening with our crude. In essence, obviously, we have one customer. We ship a lot of oil to the United States. Because of the pipeline capacity constraint, we have, as a result, a discount of 20% to 30% and sometimes even 40% on our oil, compared to Saudi oil, Venezuelan oil, or North Sea crude.

Obviously, that has a significant impact today. I'd like you to talk about how that spread is impacting our economy today and also about how it's going to impact the Canadian economy over the long term. Also, what's the single biggest thing that we, as the federal government, and the provincial governments can do to end this discount in price? What is the threat, what is it costing us, and what can we do as a country to fix it?

[Mark Carney]

Those are two very important questions.

First, with respect to, as you rightly say, jobs without people and people without jobs, this is a fundamental issue of a mismatch in the labour market. A number of Canadians are still out of work. I mean, we have had very strong employment growth, G-7-leading employment growth, in this country since the recession. We had a weak employment report, as you know, most recently in January, but if you look back over the course of the year, we've had very strong employment growth and continued growth in hours worked. Our sense in surveys of businesses is that they continue to intend to hire, so it's still a positive outlook for employment as a whole.

That said, in the unemployment rate, we have just under 20% of our unemployed who are long-term unemployed, while only 7%—“only” 7%—relative, I say, to other economies, is still higher than we need. The issue is one of mismatch, and you see it most directly in the skilled trades in Alberta—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

So that would be about training...?

[Mark Carney]

First and foremost, it's about training. It's about accreditation, to some extent, and flexibility across the economy, portability across the economy. We've made advancements there, but this is an issue that's just going to run and run and run and needs constant vigilance and investment.

And it's not just a government issue; it's a business issue as well—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

The—

[Mark Carney]

If I may, there are very important segments of our population, the aboriginal first nations segments, where this is paramount and needs to be attacked by both sides.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I want to address your concern, because the $30 million to $50 million we're losing per day on our oil discounts is—

[Mark Carney]

Yes, I want to come to that, because this is a big issue, and you have raised this in this committee a number of times. We have highlighted it because it's central to the outlook to the Canadian economy.

About a year ago, we had a very odd situation here, unprecedented for a couple of decades, whereby we had a rise in global commodity prices, including oil prices, but it was net negative for the Canadian economy because North Sea oil, or Brent Crude, which is relevant for gas prices in eastern Canada, was up, and gas prices were up. Disposable income was obviously down for Canadians. But the WCS discount was big, and we were losing on the income side.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I have only one minute left, so I want to focus on the answer.

[Mark Carney]

We have highlighted this issue again in this report, as you would have seen. This is ultimately an issue of pipeline and refining capacity. It is not our view that this is an issue of deficient U.S. demand. We see the possibility of American “energy security” in a few decades, but that's in a North American context that includes a substantial increase in exports of Canadian crude to the U.S. market. Obviously, there is an advantage to having as many options as—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

As many customers.

[Mark Carney]

Yes, as many customers as possible and multiple options from an infrastructure perspective that can be supported by the policy.