CMHC: Crazy Money Housing Cheerleaders?
Chincy shared this link to a post on the CMHC over at the America Canada blog. It’s one of the clearest looks at factors driving the Canadian housing market that I’ve seen in a long time and it’s well worth reading in it entirety. Here’s an excerpt:
CMHC indicates in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of 2009. Looking at 2008 and 2007, one can clearly see that CMHC has drastically exeeded their planned figures. 812 billion is more than likely a minimum target. At this rate the Government of Canada will be insuring over $1 trillion in mortgages and loans or 77% of GDP by the end of 2010. That is double what Fannie Mae and Freddie Mac insured on a per capita basis or the equivalent of the entire mortgage debt of the United States on a per capita basis.
Even at the zenith of the US housing bubble, prices peaked around $250,000 US while incomes were around $47,000 US. In Canada, incomes are $44,000 and prices are now at $342,000. If I have evidenced to you at this point how risky our lending has been, how are we so different than America? One might even say that we are much worse.
Read the whole post and see what you think about his conclusion. It’s a convincing argument that the CMHC has strayed far from their original mandate of making homes affordable for Canadians and engaged in activity that has the opposite effect, encouraging speculation and overlending and insuring it with your tax dollars.
July 26th, 2009 at 3:34 pm
Slippery slimy, cagey, “fork tongue” Rob Says:
“I’m just speculating, because after all, once you tell someone to stop banging the “all buyers are mental midgets” drum you really have to try to throw something new out.”
Rob, the bear argument why this is a bubble and it will end in a crash, is considerably more substantive than your argument, that this is the best real estate anywhere.
What a feeble attempt at creating a straw man argument on behalf of the bears and then, argue it to inject the fear of the probability that high unsustainable prices in Vancouver are here permanently.
We will give you an A for effort, but seriously, you are embarrassing yourself, the heavy weight regular posters aren’t legitimizing your BS with their thoughtful replies, they are just toying with you fool.
Jen the troll
July 24th, 2009 at 2:34 pm
Bears are in desperate panic so they launch an infamous propaganda here to dampen the ever upward Van RE. However,they all fail miserably. If Van RE was so bad as those losers claimed why every single house listed in past few months in van sold in a flash. Keep distorting the reality will lead bears into further humiliation. Those who can get into the market,be quick because further delay will damage your wallet . Therefore,ignore those buzzing losers and invest for your retirement. It is the golden opportunity for house shopping now after Olympic game those wealthy mainland Chinese will swallow every pc of Van RE,and left those losers in perceptual resentment.
July 23rd, 2009 at 10:21 pm
oneangryslav:
This reminds me of Albert Brooks’ Lost in America, from 1985.
Trivia time: Albert Brooks' real name is Albert Einstein. No kidding. The other one had a sense of humour too:
"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe"
Never truer than here and now.
July 23rd, 2009 at 8:57 pm
Just try and get info from CMHC … you can't … that should tell you enough!
July 23rd, 2009 at 11:17 am
Drachen:
This reminds me of Albert Brooks' Lost in America, from 1985. For those who haven't seen it, it's about a middle-aged yuppie couple, who after striving valiantly to obtain financial security, quit their jobs and set out in a Winnebago to see the "US and A" (obligatory Borat reference).
Their dreams and financial security are completely shattered one night when, as the husband is sleeping, the wife goes down to the casino in their Vegas hotel and promptly loses their "nest egg" gambling.
In a later scene, the husband admonishes the wife for having lost the "nest egg" and forbids her from saying the words "nest egg" ever again. I'm going off memory here, but I think he says something like: "and you can't even say the words 'nest' or 'egg'; if you see a nest in a tree, you have to call it a 'bird home built of twigs', and if you are talking about an egg you have to say 'round thing that chickens lay and humans eat'"
Very funny movie, and while now almost 25 years old, it's message is very topical again.
July 23rd, 2009 at 9:11 am
stagnate: "cmhc is a cash cow for the federal government, there is no underwriting risk because any liabilities can either be monetized or at worst covered by tax payers directly."
The risk comes when the CMHC is covering amounts measured in multiples of the GNP. It's a little like your wife or husband playing poker with your life's savings because it's a "sure thing". It is not a sure thing and it is a huge amount of money for taxpayers to simply "cover" as you so blithely put it.
July 23rd, 2009 at 8:05 am
fannie and freddie were set up as actual companies, the cmhc is directly linked to the central bank. chmc losses would be monetized with ease, financial markets might take a bit of a poke at our dollar but i don't think the government is too worried about that.
July 23rd, 2009 at 2:37 am
stagnate:
more than anything the cmhc is a cash cow for the federal government
Until there's a bust. Fannie and Freddie south of the border used to pay nice dividends to their shareholders. Then what happened?
there is no underwriting risk because any liabilities can either be monetized or at worst covered by tax payers directly.
Nonsense, a loss by CMHC is a hit to the Crown balance sheet and thus to the net worth of every Canadian.
July 23rd, 2009 at 12:04 am
i've said it here before, i'll say it again-the cmhc is a division/front of the Bank of Canada. there are negatives and positives resulting from that, mostly negatives. we get socialized real estate markets. more than anything the cmhc is a cash cow for the federal government, there is no underwriting risk because any liabilities can either be monetized or at worst covered by tax payers directly.
July 22nd, 2009 at 11:54 pm
Anonymous 32: No it was that there was no housing built during the war and there was widespread unemployment as the economy tried to revert itself back to full peacetime capacity. A stopgap was required until the economy could be ramped up to full speed and wages could support a residential construction demand. Many of the returning soldiers built the housing backlog when no private builders saw a business case. That was in the day when CMHC's primary focus was to actually build housing.
July 22nd, 2009 at 11:33 pm
I think it's interesting that some of you believe that there is a big conspiracy or that there is an elite group getting in your way, manipulating the markets.. etc. Someone should contact Art Bell about the CMHC!
July 22nd, 2009 at 11:14 pm
patriotzed Says:
July 22nd, 2009 at 12:12 am
Anonymous:
It (CMHC) was an idiotic mandate in the first place.
"There was a genuine need for more housing at the end of WWII."
=======================
Nobody can get by your universal wisdom, patriotzed, can they?
And so we really needed CMHC because Canada's housing stock was destroyed by bombing during the war, right? Or is it because dead soldiers buried in Normandy require more housing?
July 22nd, 2009 at 10:16 pm
Anonymous:
So what do you suggest they replace it with and how long do you think it will take? Should they choose manufacturing and take forty years to build and re-build what was lost over the past four decades?
Let the markets decide where capital goes. Right now huge amounts of capital are flowing into residential RE in Canada, an asset with grossly inferior yield and excess supply. Why? Because the government is guaranteeing financing. It's Soviet-style central planning presided over by our "Conservative" government. Meanwhile businesses cannot get financing to create or maintain jobs because the banks would rather make mortgages which are virtually risk-free for them.
Put an end to this nonsense and let the markets decide which assets to allocate capital to and at what rate, based on their yield and risk.
July 22nd, 2009 at 9:53 pm
I’m writing a letter to my MLA, the Finance Minister and the Finance Critic.
…er, make that "MP".
July 22nd, 2009 at 9:52 pm
"Securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007. Its market has grown from 100 billion in 2006, to 130 billion in 2007, to 260 billion by Q1 of 2009 (UPDATE: $295 billion by mid-June 2009). CHMC plans to expand securitization of debt to 370 billion by the end of 2009 as per the conservative government request."
It's official. They are insane. The Canadian MBS market has more than doubled since 2007 in full view of what was happening to the US and the UK. I'm writing a letter to my MLA, the Finance Minister and the Finance Critic.
July 22nd, 2009 at 4:08 pm
I get the feeling that the CMHC will turn into a greater money sink than the Iraq War.
July 22nd, 2009 at 12:40 pm
1130 Story of rising vacancy in office space in the sun too:
http://www.vancouversun.com/business/fp/Vancouver…
Just goes to show that the only business in Vancouver is Real Estate speculation
July 22nd, 2009 at 12:00 pm
Regarding: So true this would decrease leverage and therefore volatility in market cycles. It would also simplify economic shocks allowing BOC to worry just about the economy – ie their mandate. Really the benefits are endless…
==
Assuming that there aren't any unintended consequences of this kind of intervention: was the CHMC intending to create a bubble or were they simply trying to achieve another policy goal but ended up inflating one by accident?
Also why the reference to predatory lending? Does every borrower need to be hand-held and coddled when they make the biggest purchase of their lives? It's too easy to say borrowers over-extended themselves after-the-fact.
See: Predatory Lending and the Subprime Mortgage Market
July 22nd, 2009 at 11:58 am
I think Drachen's post # 24 summed it up well.
Follow the money.
The Feds can't do too much to prime the ecomomy insofar as traditional external revenue sources.., as an exporting nation, it can't force exports to other countries.
What's left ?
How can they fool others that all is well ?
The RE Market …..a prime indicator used to determine the health of the economy !!!
The "opiate to the masses" is what can be manipulated internally…such as the dream of home ownership. Manipulate policies,etc. promote certain stats and bury others.
They are in so deep there is no going back now.
If cornered, simply repeat " we never saw this coming ", perhaps a line that will go down in infamy.
Did ya hear bankrupt California, to help stem the red ink, is lifting its moratorium on Offshore drilling?
July 22nd, 2009 at 11:26 am
Cons want to win next election.
+ Cons will lose if they preside over a housing crash.
= Cons will do anything that's plausibly deniable to prop up the market.
Simple math.
July 22nd, 2009 at 11:19 am
1&4. I don't agree with this simply based on providing liquidity in the time of crisis however the overall model should be looked at. Especially for there to be recourse to predatory lending.
2. Restrict deposit-taking institutions to lending 80% of the purchase price…
A great idea. I would make it vary where it would be inversely proportional to inflation – therefore with low rates the down payment required would be higher preventing bubbling and in high inflation times the down payment would be lower allowing people to find basic shelter during an inflation cycle. This would also reduce the number of people forced out of homes during an inflationary run.
5. Since we have a market oligopoly with the big 5 banks there should be something in place to incentivise CEOs to focus on profit in the long term (ie after they've left) rather then all in the short term.
Lots of other ideas but I doubt anything will change
"The end result of this would be increased housing affordability, due to lower housing prices"
So true this would decrease leverage and therefore volatility in market cycles. It would also simplify economic shocks allowing BOC to worry just about the economy – ie their mandate. Really the benefits are endless…
July 22nd, 2009 at 10:40 am
patriotzed:
I don't disagree that the CMHC could be replaced with a better system.
But I was asking a more general question about what Ottawa should replace housing with in terms of the economy. You wrote:
"Canada has more living space per capita than ever before, and the highest real housing prices ever. Both evidence that there is too much capital and labour going into housing, not too little. Ottawa should turn off the tap. The longer it waits, the greater the mess will be to clean up."
So what do you suggest they replace it with and how long do you think it will take? Should they choose manufacturing and take forty years to build and re-build what was lost over the past four decades? Is Vancouver ready to switch gears?
July 22nd, 2009 at 9:16 am
Anonymous:
If Ottawa turns off the tap for housing, what do you suggest they replace it with and within what timeframe? What politician would take the risk?
How about a little… drum roll… free enterprise, properly regulated?
1. Do away with mortgage insurance. It is a scam, along with bond insurance in general. You can only insure against uncorrelated risks like car accidents, deaths, etc. Since debt defaults are systemic, i.e. are correlated with each other, you can no more insure against them than against an asteroid impact. This is the same reason why no private insurer would ever underwrite employment insurance. All mortgage insurance in Canada is government backed because no private insurer will assume the full risk (and yes that includes Genworth, etc.).
2. Restrict deposit-taking institutions to lending 80% of the purchase price, or a ceiling based on estimated rental value, whatever is less. In other words, the banks cannot lend more than the real economic value of the property. The government has every right to restrict bank lending because the taxpayers are the ultimate bag holders through CDIC.
3. Allow non-deposit-taking institutions to issue second mortgages for the remaining amount. They can use any lending criteria they want and charge any interest rate they want. If they incorrectly assess the lending risk, they go broke. Tough.
4. Forbid mortgage securitization. Make the lender hold the bag.
The end result of this would be increased housing affordability, due to lower housing prices. Plus a much higher savings rate, which Canada sorely needs, because a lot of people would have to save for a respectable down payment.
July 22nd, 2009 at 8:52 am
Cosmo from Concord pacific sold in 48 hours, why?
July 22nd, 2009 at 8:08 am
No Longer Looking: They could keep collecting fees and take over the job of the Homeowner Protection Office, which clearly isn't doing its job right now. The funding source for leaky condo repair loans has been a $750 levy on all new residential construction units, but apparently that well has run dry.
It seems to me we don't have a shortage of lending sources, but we do have a lack of oversight when it comes to building quality.
July 22nd, 2009 at 4:02 am
There is not risk at all my friend because as I always said Van RE are well supported by Chinese. When will those naive bears will fade away and be quite. Time and time again since 2002, they are failed by reality. Complain and resentment do no good for house ownership.
July 22nd, 2009 at 2:01 am
I could see some sort of consumer protection agency replacing the CHMC. They would have construction experts who would do random inspections of building sites to keep the developers honest. The fact that we keep having waves of leaky condos, proves how useless the CHMC is IMHO.
July 22nd, 2009 at 12:41 am
patriotzed:
If Ottawa turns off the tap for housing, what do you suggest they replace it with and within what timeframe? What politician would take the risk?
July 22nd, 2009 at 12:12 am
Anonymous:
It (CMHC) was an idiotic mandate in the first place.
There was a genuine need for more housing at the end of WWII. There was even an occupation of the old Hotel Vancouver (at Georgia and Granville) by returned veterans and their spouses. The government had sent them to war, they had the right to expect the government to help them get a place to live. Banks were still reluctant to lend money for housing so soon after the Depression. And building needed housing was a way to put veterans to work. Guaranteeing financing brought about the right results.
Today, the situation is the exact opposite – Canada has more living space per capita than ever before, and the highest real housing prices ever. Both evidence that there is too much capital and labour going into housing, not too little. Ottawa should turn off the tap. The longer it waits, the greater the mess will be to clean up.
July 21st, 2009 at 11:36 pm
"CMHC has strayed far from their original mandate of making homes affordable for Canadians…"
==================
It was an idiotic mandate in the first place.
You cannot make homes "affordable" by incorporating a Crown corporation. Only long, hard work, savings and a strong economy can do that.
If it was that simple, I suggest a Crown corporation should be established to make Ferraris affordable to all Canadians. I sure feel that the government owes me one
July 21st, 2009 at 11:03 pm
secondary suites now approved.
http://news1130.com/news/local/more.jsp?content=2…
low income housing problem solved! 280 sqft rental anyone?
July 21st, 2009 at 10:57 pm
fannie mae and Freddie Mac. everytime I hear those names I think of the guy that was in charge that got them in the mess they are in. He is now the power behind the throne. Bush had Cheney calling the shots Obama has emanuel. I guess someone thought he did a good job with getting the country in the mortgage mess. I wonder if whoever is running CHMC will get a promotion when the sh*t hits the fan over here.
July 21st, 2009 at 9:23 pm
Pope, a good read though I question how "on the hook" the government really is. CMHC has been collecting fees hand-over-fist for a long time with an extremely low default rate.
Also the article does not mention that CMHC has defined guidelines for servicing and approval criteria. It is not the case a McDonalds burger flipper earning minimum wage can go in and get a $400K mortgage. The article also paints the picture of this being a "risk-free" gift to the banks. Not so. The banks are on the hook for much of the servicing costs should the loan go delinquent. CMHC loans are set up in a way to reduce banks' spreads should they choose their marks poorly.
This should not take away from the fact that CMHC has enabled many to grasp home ownership using high debt loads. It is not necessarily true that high home ownership rates are a good thing. Worker mobility and high debt loads spell a much slower recovery from the recession. That's not a good thing at all.
July 21st, 2009 at 7:33 pm
No Longer Looking :
Good scoop.
I love the chart that goes with the story.
Example of a Current Hotwire Deal,
Rank Hotel Market Price Drop $US per night
1 Vancouver, BC 38% 3-star $70
2 New York City, NY 32% 3-star $119
3 San Diego, CA 29% 3-star $72
4 Tampa, FL 26% 3-star $71
5 Montreal, Quebec 23% 4-star $97
6 Las Vegas, NV 23% 4-star $76
7 Toronto, Ontario 23% 4-star $77
8 Oahu, HI 22% 3-star $74
9 Orlando, FL 22% 4-star $69
10 Los Angeles, CA 21% 3-star $74
The fool in the story says that prices will shoot up during the Olympics . Go ahead….my money is on it looks more and more like a fiscal disaster. Didn't China get its citizens to fill up empty seats to save face, and that was before the Global collapse.
========
On Global News , they gave us a glimpse of Stalag 2010 aka Vanoc
In essence your Charter of Rights will be suspended during the Olympics.
How's that possible? ….maybe someone can force the issue with a good challenge .
People renting/owning in the security zone ( they noted Coal Harbour ) could be subject to searches as they enter and exit their residences. Any business that tries to take advantage of the Olympics and is not an official host sponsor is subject to legal action.
Whistler created a clearcut so as to faciliate a medal presentation area….trees and habitat 100's of years old devastated for a 2 week party .
The only light I see is that this time next year the whole 2010 BS will be over, likely never to return . (if the Olympic charade is not outright cancelled ).
July 21st, 2009 at 7:18 pm
In Metrotown a third office tower is being built; around 30 stories I think. It has been in the planning stages for years, but I'm surprised they have gone ahead with it now. It should be completed by this time next year.
July 21st, 2009 at 6:56 pm
"The amount of empty retail space in Metrotown mall also seems to be growing…"
The Still Creek Drive business park is also emptying out. Whole building are vacant or will soon be vacant. And they are building a new office complex (you can see it from Hwy 1). Who is going to move in?
July 21st, 2009 at 6:50 pm
We're number one!!!
http://hotwire.mediaroom.com/index.php?s=43&i…
CBC had a news story about this and how our hotels are suffering badly right now.
July 21st, 2009 at 6:39 pm
Posted on Garth's latest Blog:
Between 1996 and 2008, the population of Canada grew 12.4%.
During this same time period the supply of dwellings INCREASED 25.5%.
Thus there is a glut of product out there. But guess what (#62) Downsized and Delighted? This glut is likely offset by the proportion of Canadians that own more than one property!!
33% of 12.4 million dwellings are rented; thus 4.1 million dwellings are either 2nd/3rd/4th properties for owners, or owned by corporations. Thus I am confident not more than 4.1 million Canadians (families) own more than one home. (12% of our population)
What was the ratio in the US before their crash??
This information is from the pdf file below, release in June, 2009:
https://www03.cmhc-schl.gc.ca/b2c/b2c/init.do?lan…
July 21st, 2009 at 6:22 pm
BBY said
" What will the property owners do to cover their costs? What will the city/province do to make up for lost commercial property tax revenue? Oh my! "
That's the another insidious part of this equation.
I'm sure many are aware of all the DCC's etc that Cities charge for new developments. It's a frikkin cash cow/license to print money. Our City raised the DCC's last year by 30 % , "supposedly" in order to be in line with other Local Gov't DCC's. That 30% adds approx $3000 – 4000 onto an average condo unit.
Bad timing.
Skytrain?
Yeah, many bought into the myth of densifying around SkyTrain…all it did was justify a Local Gov'ts new Official Community Plan as hi – rise buildings coincidentally sprouted along the route. Concurrently, this lead to THE highest prices for such land and thus the finished strata product…forget affordability.
Local Gov'ts don't care if the building sits vacant, after the DCC's and permit fees they can look to collect property taxes in perpetuity. Hi Rise buildings are the most profitable for Local Gov't…minimum initial and longterm costs I(ie as opposed to SFH and low rise). There is an owner either way, whether it be the developer stuck with unsold product or a pre-sale sucker. As a last resort, the Local Gov't can hold a tax sale to acquire unpaid taxes. Stir and repeat…$erves plenty of d#gf^ckers.
Olympics ? Fooled Ya.
The Olympics subtley brought in its own approved vendors, shafting local businesses, especially in Whistler.
The collapse of the commercial market is another canary in the mine re the residential market. How many residential hi rises have a commercial space at the ground floor…most of the ones I see are "For Lease". The irony is its often much easier to note a vacant commercial property than a residential one.
Commercial property owner pay a much higher Mill Rate (ie often 4 – 5 X's ) than residential. Thus, Empty buildings are fiscally painful. In Richmond, on Shell Road , North of Bridgeport, there is a large new 2 storey multi -building commercial strata development which doesn't appear to have a single tenant.
I think the worst is yet to come.
July 21st, 2009 at 5:45 pm
And in other news…
Lots of office space to lease and sublease according to this news1130 piece.
http://www.news1130.com/news/local/more.jsp?conte…
I know our company is trying to find sub leasers for our premises so we can move to cheaper digs. Good luck with that. There's a phenomenal abundance of commercial space begging for tenants in and near our high tech set of buildings. Convenient skytrain and highway access, yet all this space for rent. There's even a big spanking new building that has been empty for months and months since completion.
The amount of empty retail space in Metrotown mall also seems to be growing…
I'm actually surprised by this because I thought that commercial RE would be at a premium in this town leading up to the olympix, as the olympic caravan moved more and more activities into the city. Wow. If there's this much empty commercial RE going into the Olympix, think how much there will be as the Olympic caravan quickly evacuates the city. What will the property owners do to cover their costs? What will the city/province do to make up for lost commercial property tax revenue? Oh my!
July 21st, 2009 at 5:41 pm
Pope:
Many people have been referencing this article.
I agree, it is one of the clearest looks at what is going on.
The CMHC has strayed from its mandate.
CMHC(circa 2009) = Crack Money Hucked at Chumps
Who are the beneficiaries of this ?
Neither pre – bubble buyers nor bubble buyers.
Its the usual suspects aka the "vested interests".
However are they so blindly greedy or short sighted that they can't see this will ulitmately bite them in the ass too ? Its almost formulaic how they have created a crisis and have the Gov't at their beck and call with a bailout.
One stat I read was that all the bailout money already spent in the US could have paid off just about every outstanding mortgage in the US. WTF is going on ?
Defaults will result in foreclosures with more inventory than there is buyers. This will lead to across – the – board price reductions.
The U.S. is our own crystal ball.
As prices drop, more join the " lost equity " club (leq)… and see it is futile to pay a mortgage on something that is worth less than what they originally paid. You'll see the 10% leq ….. then the 15 % leq….then the 20% leq….
I've already read about other countries looking to raise their interests rates to attract capital. That could happen sooner than later, all depends on who blinks first. Then watch the dominoes fall, the BOOM all currently primed and ready to go BUST. IMHO, all the world gov'ts are in cahoots , like OPEC, but then again, like OPEC , they often break ranks.
July 21st, 2009 at 5:34 pm
Recession is over apparantly..
http://ca.news.finance.yahoo.com/s/21072009/2/biz…
July 21st, 2009 at 5:10 pm
Hey I'm # 1