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.

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I have a kilo, you want to buy it?


I hear it is difficult to actually get physical silver now

Patiently Waiting

$1750 for a two bedroom in a 1970s building in Brow of the Hill, New West. I am freakin speechless.

Please, let both the realwhore and his client go bankrupt in the New Year.



First Time Buyer

Keeping An Eye On Th

Here Penguin You might be more familiar with this: Comeuppance:

"Expect Enormous Comeuppance, Tremendous Sense of Denial, Ireland-Like Dynamics, 90% Price Drops

" I think 50-60% in some areas is more like it. Even 40% would be devastating and that would be my best case scenario."



Sorry not familiar with that acronym

Best place on meth


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.

So much for CHMC's mandate of making housing "more affordable".


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?

Keeping An Eye On Th

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.

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.


@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…

Patiently Waiting

"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.

fixie guy

@48 Yalie: Here's the same Case Shiller HPI Composite 10 index data, this time graphed as percentage monthly change instead of absolute value:

The correction is dramatic. To really see it clearly:

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.



"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.

Best place on meth

Teranet data for October shows no change in Vancouver prices.


After-tax income in B.C. to shrink more than almost anywhere in the country

British Columbians will see their after-tax income shrink more than anyone else in Canada — except Ontarians — when new Medical Services Plan premiums kick in on Jan. 1, the Canadian Taxpayers Federation says in a study released Tuesday.


A late Christmas present for bulls – – the Wall Street bull has been dressed in a lovely crocheted pink and blue outfit. Which is nice. It's cold out there for housing bulls.


fixie guy – sure, but keep in mind, the US housing bubble was the largest financial bubble of any kind in the history of the world, which is why the US govt. followed it with one of the most massive interventions in history. Notice that the symmetry was running exactly as scheduled until the panicked feds pulled out and fired all their big guns at once.

Now that the intervention has run its course, and "austerity" is the new rule in DC, I expect the bubble deflation to quickly revert to its previous (symmetric) path, as if the intervention never happened in the first place. I fully expect this to happen in Canada too; the only question being to what extent the Canadian govt. thinks it can stem the tide where the biggest nation in the world failed.

fixie guy

@44 yalie: I guess it's all in how the data is edited. The complete housing picture is a little different:


Prices here are extremely unaffordable even with an income of 125k a year gross and my finance making 70k a year we are still scared to take out a mortgage to buy a condo.

What? Do you take a cruise every month and dine out every night?

Keeping An Eye On Th


Your story confirms what I have always believed to be the case, is that dogs are better at prodding people into investments with great returns; Asians on the other hand don’t have such a good record.


fixie guy – I don't know if I'd say the US housing bubble has been "anything but symmetrical":

That red line looks pretty symmetrical to me, right up until 2009 when the US Government pulled out all the stops with 0% interest rates, government-funded refis, and first time homebuyer grants. And by all indications, the deflation is well back on its original path now that those efforts have all failed.

Ditto for the Nasdaq bubble:

I don't know how you could possibly get much more symmetrical than that.

fixie guy

@#25 Yalie: Given and the American housing bubbles are anything but symmetrical he has his work cut out.

Westcoast Crash

@vanhattan I definitely agree with your points regarding Vancouver housing. I am equally puzzled by how anyone in this city can afford a condo here much less a house to support a family. Prices here are extremely unaffordable even with an income of 125k a year gross and my finance making 70k a year we are still scared to take out a mortgage to buy a condo. Prices pretty much need to fall by half for me to feel comfortable to take out a mortgage and buy a house. We have some friends who bought a house 3-4 years ago in POCO with help from their parents for 650,000-700,000. Their parents chipped in 200k-250k, so they took out about a 500k mortgage. They are constantly living paycheck to paycheck as they have car payments, mortgage payments, cell phone bills, etc.… Read more »

The Leak

I don't even want to buy property in the lower mainland even if it does come down substantially. I just want it to come down so I can say "told ya so" to many, many people.

San Franciscan left


Hi there,

I posted this a year ago shortly before I got out of there. Mind you I was only there for about 6 months altogether before I left that place for good.

2012 sounds about right for this market to unravel. To be able to catch one of the last trains of this bubble, I would be getting out of it by spring 2011 at the latest.