In a recent letter to Karen Kinsley, president and CEO of Canada Mortgage and Housing Corporation (CMHC), Bank of Canada Governor David Dodge laid into the crown corporation for introducing new mortgage packages that, he said, will stimulate higher housing prices and, therewith, increase the overall inflation rate.

"I read with interest and dismay your press release of June 28 which indicated that CMHC would offer mortgage insurance for interest-only loans and for amortizations of up to 35 years," the two-page letter says.

"Particularly disturbing to me is the rationale you gave that 'these innovative solutions will allow more Canadians to buy homes and to do so sooner.' " The corporation's actions are likely to drive up house prices and make homes less affordable, not more, Mr. Dodge says in the blunt missive, uncharacteristic of the usually tempered language of the central bank.

By stoking inflation with proposed new policies, CMHC is undermining the work of the central bank with "very unhelpful" actions, Mr. Dodge said.

Mr Dodge appears correct in his belief that CMHC's "innovative solutions" will tend to fuel higher housing prices.  The new mortgage offers will enable more Canadians to buy houses, thus increasing housing demand; in the absence of supply increases, that can only drive up selling prices.

The mortgage packages newly offered by CHMC have long been available in the US home-mortgage market.  Late last week, new economic figures were released showing that US housing prices nose-dived almost 10% in September—the largest fall in over 35 years.  Did no-interest mortgages have anything to do with that?

A recent study found that, of Americans who took out home mortgages in 2005, 29% have zero equity in their homes or owe more than their homes are worth.

Dodge’s letter to Kinsley was written 30 June, but only now obtained under the Access to Information Act.