Canada's Housing Bubble

Oct 21, 2009  Diane Francis network.nationalpost.com

Canada's risky real estate business where residential may take a big fall

Ottawa has been creating a housing bubble in Canada with taxpayer money which is why residential real estate prices rise in defiance of high unemployment and recession.

Ottawa's low interest rate policy and crown agency Canada Mortgage and Housing Corporation's dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed upward activity and prices.

Some, such as Post reader and accountant, Derek Bruce, worry that the Tories are allowing CMHC to become like Freddie and Fannie south of the border, a rogue financial institution the size of one of our big five commercial banks.
In March, CMHC was allowed to insure up to C$600 billion in mortgages, up from C$450 billion the year before, said a CMHC spokesman today.

“Last year alone, CHMC did 919,780 deals worth a staggering C$148 billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to C$600 billion, or about double what it was two years ago,” wrote author, former MP Garth Turner.

Uh oh

This is a looming problem which flies in the face of Ottawa’s smugness about its superior regulatory regime and Canadian banking conservatism.

For starters, CMHC is as big as a bank and not regulated.
It's a mortgage slush fund which distorts the market. It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone. It rewards those willing to speculate with leverage and discriminates against those who are prudent. It's unfair because the Canadian banks charge the same mortgage interest rates to those who put only 5% down with CMHC backing as those with skin in the game and large down payments.

Thus Canada's real estate markets are hitting highs in the middle of the worst recession since the Great Depression.

“Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments thus insuring end-investors these papers are insured from loss,” wrote Bruce.

Distortions

Some may argue this is simply another stimulus strategy, but this is canceled out by the fact that it encourages bad and unfair behavior and banking practices. It also has serious monetary/currency implications because air will eventually have to be let out of the bubble by imposing higher interest rates. This will mean a higher Canadian dollar.

The question is why should taxpayers be involved in this when it shoots them collectively in the foot? Why shouldn’t banks have skin in the game? And home buyers? If not, why shouldn’t they share the upside with taxpayers?
This amounts to a subsidy to our highly profitable commercial banks, real estate developers and speculators.
The greater good would be served if housing prices fell to where a fair and unfettered market dictate, thus squeezing out real estate inflation and creating sound ownership opportunities.

Aussie medicine
A similar bubble was attacked by Australia where interest rates jumped to 3.25% (from 0.5%) and damage to exporters, as a result of a higher than otherwise currency value, has resulted.
Clearly, CMHC must be reined in and regulated properly.