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.Yes, this is a bubble. Yes, it's been fueled and guaranteed by Canadian taxpayer's money. Yes, you should be angry. Yes, when the president of the VREB states he sees no downside risk to Victoria real estate prices and sales volumes he is clearly ignoring the facts.
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 up 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 $600-billion in mortgages, up from $450-billion the year before, a CMHC spokesman said yesterday.
"Last year alone, CHMC did 919,780 deals worth a staggering $148-billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to $600-billion, or about double what it was two years ago," wrote author and former MP Garth Turner.
This is a looming problem that 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 that 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 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," Bruce wrote.
Some may argue this is simply another stimulus strategy, but this is cancelled out by the fact that it encourages bad and unfair behaviour 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 homebuyers? 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 dictates, thus squeezing out real estate inflation and creating sound ownership opportunities.
A similar bubble was attacked by Australia, where interest rates jumped to 3.25% (from 0.5%) and damage, as a result of a higher currency value, resulted.
Clearly, CMHC must be reined in and regulated properly.
Thursday, October 22, 2009
Diane Francis tells it like it is
This article merit's no highlights or editing, re-posted in full: