Don sent in a link to this interesting editorial on Canadian housing bubbles and the CMHC in the Winnipeg Free Press. The author does a good job of touching on the background of bubble mentality, including the classic Dutch tulip bubble. They then talk about the US housing bubble and compare it to the Canadian market.
Millions in the United States are homeless as a result of the subprime mortgage debacle, which had the effect of vastly inflating both the seeming buying power of consumers and seeming value of houses.
In short, Americans were getting credit at rates so low that they could buy way more house than they could afford if credit charges increased, which they did.
We don’t have a subprime problem here, so we won’t have a real-estate bubble, we are told.
In fact, just this week, Bank of Canada officials were assuring everyone that steep increases in house prices are the “natural” consequence of pent up demand during the recent trough, which also had the effect of suppressing prices so that surging prices now appear to be surging faster than they are.
Now, I’m no expert and I’m inclined to believe what the experts tell me.
But I also hear opinions of people in the property racket who aren’t so sure. And their concern is not so much that Winnipeg house prices have climbed 78 per cent in the past four years, as the new reassessment reveals. Or that there are stories about house hunters sleeping in the streets of Vancouver in hopes of snapping up a $1-million house that we would pay no more than $350,000 for.
No, their concern is that low interest rates and long-term amortization periods are making it easy to get into the market — maybe too easy. But more concerning is that all this demand is being insured by the Canadian Mortgage and Housing Corp.
ahh, yes, the good old CMHC. So what could be the problem of the CMHC insuring demand for Canadian houses?
As the financial crisis started to hit in 2008, the federal government increased the ceiling of mortgage insurance CMHC can have outstanding — from $350 billion to $450 billion, and then $600 billion.
The move is widely regarded as a key measure that helped prevent the kind of credit crunch that so hurt the United States. And just about everyone who has commented on the changes, including Liberal finance critic and former bank president John McCallum, are cool with that.
But my sources wonder if CMHC, which insured 920,000 housing units in 2008, 350,000 more than it intended, according to the Globe and Mail, was in a position to ramp up its due diligence as fast as it ramped up its underwriting.
It’s a good question because, if there is a bubble, Canadian taxpayers will be on the hook for all the paper.
The full article can be found here and is a good read.