Mortgages, benefits and the battle for the bottom

Russell
Russell Wangersky
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Maybe I’m hopelessly optimistic about this — or maybe, at the same time, it’s hopelessly pessimistic. But things go in cycles and that means, eventually, things end up turning around.

Take mortgages: not that long ago, maybe a week ago, federal Finance Minister Jim Flaherty was warning Canada’s banks not to get into a race for the bottom when it comes to mortgages. His painfully simple message? That it’s not a good idea for everyone to be trying to fill their residential portfolios with plenty of low-interest mortgages, because competing for the bottom could leave the banks caught out when, eventually, interest rates start to climb.

The race for the basement has pretty much continued, though, because the banks, like many businesses in this country, are more focused on their year-over-year financial numbers than they are on where their business will be in 20 years, or even 10.

And that’s not all that surprising. This may be a simplistic way to think about things, but many larger companies in this country — banks included — reward their executives with bonuses based on single-year performance. If you’re in management, it may be financially better — for you, personally — to make a decision that helps this year’s bottom line, even if it could damage the company further down the road.

Perhaps that’s why benefits for employees in Canada are on the slide as well. The number of private sector companies in this country that actually offer pension plans, for example, is critically low. And for those who do, the last decade or so has seen many flee from defined benefit plans to defined contribution plans, a measure that improves the bottom line but, somewhere down the road, can leave retired employees trying to figure out how to live on peanuts.

Trimming away benefits may help the bottom line in the short term — and that may mean a few years of bonuses for those who make the decisions. What’s forgotten in that is why there are benefits in the first place — but I’ll get back to that.

There’s an interesting object lesson unfolding on the Northeast Avalon right now for those who employ people at minimum wage. For years, employees in that segment of the economy were hurt by the fact that jobs were limited. It was better to have a less-than-perfect job than find yourself out on the street. But the number of jobs has grown, and employers are now finding it difficult to fill positions — not only that, but employees are benefiting from a new and unusual mobility.

Unencumbered by benefits and pensions — and able to find new work quickly — employees are much more in the driver’s seat.

Anyone with minimum-wage workers in this part of the province can tell you they’ve had staff quit over something as simple as a change in schedule. Give those employees grief and they give you the finger. That’s new for employers here, and it’s a shift in the power dynamic that’s worth thinking about.

So, back to pensions and benefits — and why workers had them in the first place.

Companies offered pensions and benefits as part of salaries to entice good employees to stay, and to make it that much more unlikely that your good people would simply pull up stakes and head out. After investing years in a pension, it can be scary and risky to take a hike.

But without those enticements, you go back to the very simplest of equations — and that’s what’s happening with the minimum-wage equation here. The only things on the table become money and opportunity — and both of those can be somewhere else very quickly.

Eventually, I think people will recognize that benefits actually served a purpose — and smarter companies looking for smarter, better people will go back to offering them. And those who don’t? I think they’ll end up getting the finger.

Russell Wangersky is The Telegram’s

editorial page editor. He can be reached by email at rwanger@thetelegram.com.

Geographic location: Canada, Northeast Avalon

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  • STAMP
    March 19, 2013 - 13:39

    This is further to your comment on banks. The worldwide financial collapse of 2008 was driven largely by a banking and brokerage industry out of control. The bailout costs were astronomical. Canada's banks fared the best among G7 nations and yet the federal government was forced to turn over $75 Billion in taxpayer funds to keep them afloat. And while the good times have returned for Canadian banks, the international banking community is hardly out of the woods yet as evidenced by the continuing euro-crisis. Governments have done almost nothing to reform them. As you point out, senior bank executives continue to be rewarded handsomely for taking excessive risks. (It should be noted that, since banks are still to big to fail, any risks they take are not their own but rather those of the taxpayer.) What the Harper government has done is to make it more difficult for banks to issue mortgages. It reduced the amortization period, increased the downpayment requirement, and lowered the share of household income that can be allocated to debt retirement. Ironically, one of the banks that publicly endorsed these restrictions was the Bank of Montreal which has since become one of the most aggressive in competing for business with discount mortgage rates (below 3%). It is because of this 'race to the basement' as you put it that Flaherty has warned the banks against an all-out rate war. This, in my view, creates a problem for both government and the consumer. It is perfectly acceptable for Flaherty to choke off mortgage lending with the range of levers he has already used and others he has not. But in advocating that the banks back away from competition based on rates is tantamount to an invitation to price-fixing. Canadian banks have racked up unprecedented profits in recent years - $7.3 billion this past quarter alone. Do we really need to inflate those profits even more by suggesting they set the spread between their borrowing costs and lending rates artificially high? Other than to further restrict mortgage rules, Flaherty could consider other alternatives. These include a special tax on mortgage profits and/or a requirement that the size of their household mortgage portfolios be tied to their volume of small business lending activity. Anyone knowledgeable of banking trends in this country is aware that banks have, defacto, stopped lending to small business altogether. Their minimum security is now several multiples of the face value of the loan and their profits are routinely built into their upfront fees. In essence, banks see no point in taking any risks whatsoever in dealing with small business when they can invest in mortgages which (by virtue of written and unwritten government guarantees) carry no risk at all. Among other things, this explains why we no longer have even mid level bank executives in this province. You don't need high level management to send mortgage applications up the pipe.