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CMHC really wants you to buy something.

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The Canadian Mortgage and Housing Corporation is expanding like never before.  Ottawa has just raised their mortgage insurance cap from $450 billion to $600 billion.  At the end of 2007 the cap was $350 billion.  Garth Turner already has a great post on this subject at Greaterfool.ca, so I thought I’d focus on one aspect of this topic: Does the governments actions make it rational to buy more house than you can afford?  This comment by “hp” is from Turners blog:

First time buyers putting 5% down may be acting rationally. Perhaps they realize they are taking a chance on bankruptcy. Five years down the road, if interest rates are high and property values have dropped, they may be willing to file for bankruptcy. In the meantime, they had a nice house.  Also, there is new legislation that RRSPs will be protected during personal bankruptcy. Why not put all your savings in your RRSP and pay minimum payments on your house? Then see what happens when your huge mortgage comes up for renewal in 2014?

There is some logic to this approach if you’re willing to file for bankruptcy and can protect the bulk of your savings in an RRSP.  The government is clearly saying that saving up more than a 5% down payment is a hardship you should not have to endure.  They seem to be saying they will do what they can to keep fueling the housing market, no matter how risky or silly their actions may be.  What are new home buyers to do?  Go along for the ride or sit out and save in the hope of a US style return to sane pricing?

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Anonymous

Denial-Dave is back. Ts ts ts, you are something else man…

You just refuse to get it.

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Drachen

No, I think the Conservatives knew perfectly well the market was becoming unstable and if it collapsed they'd be in trouble so they encouraged the CMHC to loosen things up a bit to try to keep the market going several years before the correction. Is it so hard to believe that people knew years in advance what was going to happen? People were talking about that on VHB before then and we are all just a bunch of self-educated amateurs, you think the government doesn't have access to better analysis than we can put up?

I can never tell, are you being disingenuous again or do you really not understand?

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crabman

@Dave: I gave you a link that spells out in great detail exactly what CMHC is doing. As I expected, you seem to have completely ignored it in favor of continuing to argue with everyone who doesn't agree with you.

It's too bad. You could learn a lot from the people on this blog, many of whom have decades of experience in RE investing. Your stubbornness could wind up costing you a lot of $$$.

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Dave

@Drachen:

So you think the CMHC saw and reacted to the Fall 2008 market correction two years before it happened?

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Drachen

Dave, you spend half the time trying to show everyone how smart you are and the other part 'playing' dumb (playing is in quotes because I sometimes wonder…). There have been reams of info on here about how the CMHC has helped prop up the market, it's pretty obvious what they're doing when they extend the periods they'll insure from 25 to 35 years or drop the minimum down payment, they're trying to lower the bar and by doing that they're helping more people enter the market which keeps the whole thing going.

So tell me now, are you too dumb to figure that out or were you being (my favourite word to describe you coming up here) disingenuous again?

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observer

@Disbelief: Water beats rock in the long run. We rent this world from landlords who borrow from us.

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Disbelief

In Dave's mind he will always be right. It is impossible to convince a rock is not a rock. After all this is Dave's world we just rent it.

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observer

@Dave: If that's the only point you are trying to make, it isn't very interesting. It's like saying drug dealers don't have anything to do with drug addiction because ultimately it is the drug user who makes the action to take the drug. The dealers only provide the drugs.

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domus

Dave, see the posts by Patriotzed and others, which explain more eloquently than me. My simle answer to you: most recent loans, and therefore most recent transactions, would not exist without the CMHC. In a working market there would be price (interest rate) discrimination: people with low downpayment would have to pay a higher interest, which would mean a lower loan size. This would immediately reflect in lower number of transactions and lower prices. This is a market on drugs, where the drug is subsidized credit. It cannot, and will not, last much longer. The crash had started eagerly in 2007 and by now it would have erased 1/3 of nominal valuations. Concerted government intervention, in Canada and abroad, has backstopped the market and temporarily halted the slide. Governments were scared of the huge negative 'wealth' effect that a drop… Read more »

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observer

@patriotzed: Yes, you are correct. So what has changed is that the banks off loaded their riskier mortgages to the crown but as you say the crown was backstopping everything in either case regardless of who owned the mortgages. The other thing that has changed is that the banks have more leg room to underwrite more mortgages as a result. In hindsight, this may turn out to be an action which in the long run produces more risk of a collapse and hence more risk for the crown/taxpayer. Ultimately, it is a policy decision by our government.

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crabman

@Dave: If you really want to understand the CMHC issue, it is spelled out in detail here.

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Dave

@observer:

And that was my point. Nothing changed with the CMHC last Fall. So we can't claim they are responsible for having 'intervened' or 'backstopped' the falling market.

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John

Dave, you little pudle! I just came to the office thinking you are working hard so I should give you a massage to realize that you actually left right after lunch break. Shame on you.

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patriotzed

@observer:

The government bought mortgages from banks and insured them through CMHC if I recalled correctly.

If you're implying a sequence of events from that wording it's incorrect.

The order of events is that the mortgages are insured by CMHC at time at issue, and later some of them are purchased by CMHC (Canada Housing Trust). Since the Crown has been the guarantor from the beginning, the subsequent purchase does not create any additional exposure for the Crown. CMHC (or any other Crown agency) does not purchase uninsured mortgages.

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patriotzed

@observer:

It has been said the RE is a good hedge against inflation

It is if you pay a reasonable price for it.

This is the basic truth that so many people somehow don't seem to get – whether RE, or anything else, is a good investment depends on how much you pay for it. Buying an overpriced, leveraged asset at a time of record low interest rates is not a hedge against inflation. Or deflation for that matter. It's just stupid.

Ulsterman: A few posters have wondered why i would be “obsessed” with buying because they simply love renting

We don't "love" renting for its own sake, the point is that we just want to get our money's worth, and you can only get your money's worth today by renting.

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observer

@Dave: To answer your question: the CMHC was the vehicle by which the government and banks were able to keep credit flowing to buyer's who would otherwise would not have been able to get a normal bank mortgage. So although they did not initiate any new action last fall except to expand their operations, they were an essential part of the mechanism. To make an analogy: the banks and government pulled the trigger, the weapon was the CMHC, and victim will be the taxpayers and our future economy. The beneficiaries will be homeowners who contributed little to the economy.

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observer

It has been said the RE is a good hedge against inflation. Even if you brush aside the issue of mortgage rates rising with inflation, here is an article which suggests otherwise.

Metro Vancouver predicts 50-per-cent tax increase over five years

http://www.vancouversun.com/news/Metro+Vancouver+…

Seems like poetic justice to me. Now all we need is a specuvestor tax and requiring 40% down payment for RE which is not for personal use (like they do in China).

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realpaul

@ReadyToPop: #128, Finally, a voice in the wilderness. Dianne franci is actually read. Unfortunatley, Garth, although he was spot on is not popular with the liberal media in Toronto. But…they cannot avoid Diane Francis. This story will have political ramifications no doubt. The Feds have re directed the 'stimulus funds' to this housing scam, all for political gamesmanship, keeping the facade of stability while Rome was burning. The opposition finally has the publics attention and will fire all guns at this one. There is one thing Canadians hate more than a housing crash and thats a waste of money supporting someone elses gain. Why this story has been kept quiet by the media is the real question. The Cons agreed to a 55 billion dollar deficit , what happens now when its made public that they've added a 600 billion… Read more »

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patriotzed

@Dave:

Are you really that thick Dave? CMHC is allowing the banks to make loans on RE without regard to default risk. You don't call that backstopping or intervention? Do you really think the flood of capital going into RE could continue if the taxpayers weren't holding the bag? Would you loan your own money out to someone at 3% to buy an overpriced Vancouver crapbox?

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observer

@Dave: Let's hope you are right so rates can move back to historical levels! On the other hand, the yield curve has gotten ever so slightly flatter so you know what that means. The government bought mortgages from banks and insured them through CMHC if I recalled correctly. Also, as the article of this thread states, the size of CMHC limits has increased. It isn't hard to witness this first hand. If you go to any bank and have a fair amount of money in your accounts, you will almost invariably be asked if you are interested in their mortgage products (together with possibly some encouragement that this is a good time to buy due to the low rates and softening prices). Until I see the stats which consistently show a more narrow spread between % price below and %… Read more »

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Dave

@domus:

You are dodging the question. How does an insurance provider cause the market to go up and how did THEIR actions 'backstop' or 'intervene' in the market? Your words, not mine.

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Ulsterman

A few posters have wondered why i would be "obsessed" with buying because they simply love renting. What i want is for house prices to return to fundamental levels of even say, 150 times annual rent. This way i could buy my rented house and when i retire in 25 years (and have the mortgage paid off) i will only have repairs and taxes to pay, not 2400/month from my pension. Also, owning my rented house would mean i could make changes beyond paint colour. This isn't so important to me, but ask my other half. Renting would take away the concern that i get an eviction notice when the landlord's mother passes away in her nursing home and he decides he may sell the place. Sure i could find another home, but it's a huge pain in the ass… Read more »

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patriotzed

@Purp: I was thinking more along the lines of the stagnant local prices during most of the 90’s, which didn’t have the crippling economic malaise. The real price peak of 1995 was nowhere near the peak of 2008 or today's real price. It was about the same as 2005's real price, at which time most of us were just starting to call a bubble in Vancouver. Also note that the 90's saw declining interest rates which improved affordability and softened the price decline. And during the 90's the economy was much less dependent on RE (high tech did very well for example) which meant less of a snowballing effect from a declining RE sector. Today we have almost record high real prices combined with record low interest rates and a record high % of the local economy based on RE.… Read more »

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domus

Dave,

you mighty mind and great entrepreneur…..the CHMC increased lending guarantees by an unprecedented amount over the past 12 months. The majority of new mortgages extended in Canada now enjoy full tax payer backing. Is that enough for you?

Given your brilliance and work ethics, can I ask you a simple question: what do you think the interest rate on a 5% down, 35 years mortgage should be? Should it be 4.1%?

The low mortgage rates (and interest) paid by new buyers with little downpayment are nothing but a net transfers by tax payers, who are providing the guarantee….if these guys default, we all end up paying their bills. However, if the market goes up another 15%, they get to keep the gains. Are you getting it now?

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Dave

@mk-kids:

I think the economy is picking up. I know it is just one data point, but it's 10 pm and I am still sitting in my office.

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