Thursday, October 25, 2007

Why this is actually irrelevant

Hence why they did it. H/T VG.

CMHC is an arms-length crown corporation. What this means is that they receive no government direction, and they don't, and that they receive little government funding, and they do; so they must be self-serving and self-sufficient, and they are.

I do agree with Mohican over at the Financial Planning Personal Sanity blog, it is nucking futs. But that said, I don't believe this will have any impact whatsoever on the Victoria real estate market. And here is why (Yes, I've purposefully picked the cheapest investment property I can think of):

2-bed 1-bath condo worth $200K with $1200/year property tax and $150/monthly assessment.

With a 0% down mortgage you'd be mortgaging $215K ($15K insurance premium to CMHC) for a monthly mortgage payment of:

Say you're a RE "investor," you take out this mortgage on this dumpy condo, you rent it out for market rates of around $1.25/SF. So you're getting around $1000/month. But you're paying out
$1222 in mortgage, $100 in tax, $175 in MA for $1497 or a $500ish loss every month. Let's say you squeak out a bit more for rent. You won't get $500, maybe $200. That's irrelevant.

The only "investor" for this deal is actually a speculator betting that they'll make their money in inflation and mortgage paydown. CMHC already ate up 7.5% of your inflation (before interest) and considering that condos are overbuilt and already coming down in price (new ones especially) I don't think we'll see too many banks willing to do this deal. So the "investor" will have to go to the alternative market which means they are paying more interest (not to mention that alt-mortgage funds are extremely threadbare with the credit crunch) and their already negative margins just got more negative.

Now this new product may have broader implications in other segments or markets, but in the local Victoria rental pool where rents are barely 60% of carrying costs for the most part, a 100% down mortgage makes no economic sense whatsoever.

Anyone stupid enough to get into this product deserves to lose their shirt when the market corrects. CMHC may get caught holding the bag, but the debtors get taken into bankruptcy first. The premiums that CMHC will charge are designed to make them money. Pure and simple. This is a huge risk that they are aware of; they built that into their business model. In other less-inflated markets, pretty much anywhere east of Manitoba, this product will be a big time money-maker with limited market implications. CMHC is facing increased competition, they got some free advertising today, I doubt if they got much else.


vicgeo said...

while actually doing 0% d/p from the homeowner point of view seems ridiculous it doesn't mean CHMC is nuts. they are making you pay an insurance premium for the right, though the amount charged may appear low.

hhv said...

7.5% is anything but low

Anonymous said...

On the bull site I go on people said they are renewing, just recently, for 5.8, 5.4 and someone even said they renewed for under 5. No one said 7.


vg said...


I am sure there are still people getting rates in the 5's, my point was the article in the ROB page was saying to get it done now cause in the next while the discounts won't be so generous. How long til they tighten is the question. I am sure they have a pot of money they have they can lend out to the best clients but those on the cusp may not get those special rates.

It's so amazing to see a point and half off as only a few years ago you had to go directly to a broker to get just a one point discount as the banks wouldn't budge from the posted rates unless you were a very deep pocketed long term client. Shows how fast they want to dump this cash out still to lend out so loosely with the credit crunch so far from being over.

vg said...

I just don't get the numbers either HHV,nor how this is going to help the rental pool.How are they supposed to cover costs when the rents are so retarded already due to speculators driving this whole market to begin with,the so called "real demand" was topped up long ago. US style tank job is coming,full steam ahead.

vg said...

Interesting article off Vancouver Condo

Why is Vancouver eating its young? Nothing cool about that