Canadian Debt and the CMHC
Would’nt it be interesting if an article in the mainstream news cut through all the sound bites and blame over fears of ballooning consumer debt in Canada? Flaherty tells consumers they must be prudent with their debt loads. Banks say they need new mortgage rules because they can’t limit lending without them. Carney reminds buyers that values go up and down but debt endures.
How did we get to the point where Canadian household debt is as high as the USA at it’s housing bubble peak? Is it just ‘cheap credit’ or is there another reason?
.. Oh, look! The CBC has published something interesting:
The reason consumers are borrowing so much is that the government has been encouraging them, just as it’s also been encouraging the banks to lend. It’s called CMHC insurance and the way it works is that Ottawa guarantees virtually all of the risky home loans made by the banks.
The program was originally conceived as a way for low-income Canadians to get mortgages and buy homes.
That’s a good thing but it also provides a key benefit to the lenders since it removes risk of default. In effect, CMHC insured home loans are as safe as government bonds and that’s allowed the banks to treat them as such.
“What’s happened is it’s become the major source of bank financing in Canada,” said Mr. Kilgour. “At a time when you’ve got basically a stagnant economy you have free-flowing liquidity to residential credit.”
Simply put, loans that would otherwise be regarded as less than top quality are transformed into triple A gold, courtesy of the tax payer.
“If the government wanted to slow down the growth in consumer debt, a hugely effective policy move would be to reduce the cap on the level of mortgages that CMHC is allowed to insure,” said Mr. Kilgour.
But don’t we need mortgage insurance for a healthy economy? Shouldn’t we be keeping it in place while the future looks a bit rocky?
Maybe.. or maybe we just shouldn’t be pumping more and more money into a scheme with no long term benefits:
For the first time the amount of outstanding mortgage backed securities passed the $300-billion mark earlier this year, more than double the amount at the start of 2007.
2010 issuance is expected to reach $100-billion, the third highest level in history.
The banks love it because it’s risk free business, and investors love it for the same reason.
The problem is that it’s encouraging banks to lend at a time when they need to put their foot on the brake.
According to Mr. Kilgour, what needs to happen is for the CMHC to reduce the amount of insurance it provides.
Without that, “there’s no motivation for the banks to tighten up on lending – since they know that by the time the stuff hits the fan, much of their risk will be off the table,” said Mr. Kilgour
Read the full article over at the CBC website.
December 30th, 2010 at 8:33 am
@penguin:
I have a kilo, you want to buy it?
December 29th, 2010 at 10:24 am
I hear it is difficult to actually get physical silver now
December 29th, 2010 at 8:38 am
$1750 for a two bedroom in a 1970s building in Brow of the Hill, New West. I am freakin speechless.
http://vancouver.en.craigslist.ca/bnc/apa/2135142…
Please, let both the realwhore and his client go bankrupt in the New Year.
December 29th, 2010 at 8:31 am
@penguin:
First Time Buyer
December 29th, 2010 at 8:27 am
Here Penguin You might be more familiar with this: Comeuppance:
"Expect Enormous Comeuppance, Tremendous Sense of Denial, Ireland-Like Dynamics, 90% Price Drops
http://www.kktv.com/news/headlines/Major_Cities_S…
" I think 50-60% in some areas is more like it. Even 40% would be devastating and that would be my best case scenario."
December 29th, 2010 at 7:49 am
FTB?
Sorry not familiar with that acronym
December 29th, 2010 at 4:54 am
@penguin:
As far as I know there is no reliable data on 35 year mortgages other than anecdotal suggesting that it is more than 50% for FTB's.
This guy pretty much nailed it when he wrote about the consequences of extending mortgage terms back in 2006.
http://www.ired.com/news/mkt/35yr-mort.htm
So much for CHMC's mandate of making housing "more affordable".
December 29th, 2010 at 4:10 am
Does anyone have a link to the # of 5/35 mortgages in the Vancouver area?
What is the % equity of the average house in Vancouver? Or how about the average mortgage owing
What are others doing for investments while waiting for the housing correction?
December 29th, 2010 at 3:09 am
The housing market took a turn for the worse.
Home prices in 20 major cities, including Denver, dipped 1.3 percent from September to October. Analysts say the market is on the verge of a double-digit slump,citing October’s numbers as a continuing trend. Atlanta, Charlotte, Miami, Portland, Ore., Seattle and Tampa all hit their lowest levels since the housing bubble burst in 2006.
http://www.kktv.com/news/headlines/Major_Cities_S…
Of course it can't happen here,THE BEST PLACE ON EARTH,and we have rain and Rennie.
Or maybe the Chinese investors can't find these places on the map.
December 29th, 2010 at 2:47 am
@blueskies: "British Columbians will see their after-tax income shrink more than anyone else in Canada"
…after a few years of seeing their after-tax income expand more than anyone else in Canada. Somebody has to pay for all those public sector pay raises and debt service payments…
December 29th, 2010 at 2:39 am
"I believe that West Vancouver and Vancouver West will probably for the most part maintain their prices and only experience a very mild decline 10%-15%, while the majority of Greater Vancouver area like Surrey, Delta, downtown, North Vancouver, POCO, Coquitlam, Burnaby, and parts of Richmond will see serious declines 30%-40%."
You are going to see fairly uniform drops across the board. West Van and Van West may fall a little after other areas, but will fall a little harder.
December 29th, 2010 at 2:23 am
@48 Yalie: Here's the same Case Shiller HPI Composite 10 index data, this time graphed as percentage monthly change instead of absolute value:
http://img690.imageshack.us/img690/8168/201010csh…
The correction is dramatic. To really see it clearly:
http://img252.imageshack.us/img252/1550/201010csh…
This graph shows how how quickly the monthly percentage changes are occurring. If the first graph shows the 'speed' of change, the second demonstrates 'acceleration' of change. In the collapse phase price fluctuations are much more dramatic. Simple symmetry doesn't capture these effects.
December 29th, 2010 at 1:56 am
@Anonymous:
"BTW @ 200K a year you should be able to save a crazy amount of
money and still rent….something doesn’t sound right…."
He said that he couldn't find a landlord who'd let him keep the dog.
December 29th, 2010 at 1:29 am
Teranet data for October shows no change in Vancouver prices.
http://www.housepriceindex.ca/Default.aspx