Should incentives go to the supply or demand side?

The Canadian Mortgage and Housing Corporation (CMHC) is Canadas national housing agency.

The front page of their website says this:

Backed by more than 65 years of experience, we work with community organizations, the private sector, non-profit agencies and all levels of government to help create innovative solutions to today’s housing challenges, anticipate tomorrow’s needs, and improve the quality of life for all Canadians.

This is a bit vague, but let’s assume ‘today’s housing challenges’ includes the availability of affordable housing for all Canadians.

With this goal in mind there are two ways you could use government money to create incentives for housing: The supply side or the demand side.

CMHC works on both sides, but over the years they’ve shifted the bulk of their support to the demand side.  This means that instead of directly funding the construction of housing or providing incentives to builders, they provide support to the buyer mainly in the form of mortgage insurance for risky loans.  Of course this support is actually provided to banks to make their loans risk free, but the end result is that more people are able to pay a higher price for housing due to more availability of credit.

In concert with record low interest rates and a speculative mania this has driven housing prices to record highs in Vancouver and inflated prices across the country leading to talk of a national Canadian housing bubble similar to that seen in the US.

If we really want to use government to assist in the creation of affordable housing shouldn’t we be providing incentives to the supply side instead?  It shouldn’t be a stretch to understand that building more housing and providing less credit to home buyers would drive prices down making homes MORE affordable.

But nobody really wants to drive prices down do they?  So instead we get vague statements about housing challenges and smoke and mirrors attempts to improve ‘affordability’ by providing ever cheaper credit.

That hasn’t worked in any housing bubble yet, but hey! Maybe it’s different here!

 

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patriotz
Member
Why do we need incentives to build housing at all? Is there a shortage of housing? Quite the contrary, there is more dwelling space per capita in Canada than ever before. Are rents high relative to incomes in historic terms? No. But current government policies encourage housing to be underutilized. Lots of people live in dwellings that are much bigger than they need. Some of them are owner-occupiers who are effectively speculating on price increases, some are seniors who are encouraged to stay in their houses by property tax deferrals, some are speculators who keep dwellings empty. Get rid of some or all of these policies and you will see better utilization. There is no housing affordability problem in Vancouver or anywhere else in Canada. What we have is an income distribution problem – some households don’t make enough income… Read more »
patriotz
Member

Home prices 3.6% higher in September from a year ago

But not in BC:

Six of the 11 markets that the index studies saw prices fall last month. The decline was highest in Victoria, where prices fell 1.3 per cent. Vancouver saw its prices drop by 1.2 per cent for the second month in a row.

Vancouver y/y -1.42% m/m -1.19%

Anonymous
Guest
Anonymous

“With this goal in mind there are two ways you could use government money to create incentives for housing: The supply side or the demand side.”

We don’t need CMHC period. Shut it down, sell the assets and tell the banks sorry your mortgages are no longer insured. Good luck.

real_professional
Member

Teranet Just released this—-

This year’s September prices were down from the month before in six of the 11 metropolitan markets surveyed, led by Victoria (−1.3%) and Vancouver (−1.2%). For Vancouver it was the second 1.2% decline in a row, a result consistent with the city’s rating as a buyer’s market since August by the Real Estate Board of Greater Vancouver

bubbly
Member
bubbly

What an idiotic article and a false dilemma. There should be zero housing incentives from the government. The existing incentives are among the main causes of the current unaffordability.
Get rid of CMHC.

real_professional
Member

Teranet stats for VANCOUVER – we are now negative YoY, MoM, and YTD

% change y/y: -1.42%
% change m/m: -1.19%
Year to date: -0.60%

Whoot whoot!!!!!!!!

asalvari1
Guest
asalvari1

something that caught my eye, from garth’s latest post:

The financing of houses above 1M is 80% of the first M, and then 50% after that. This means that for 1M House, DP will be 200K, but for 1.1M DP is 250K (200K for 1M and 50K for the rest).

Obviously, for 1.5M DP is 550K or for 2M house DP is 800K.

Garth informs that this is something that banks are using in Toronto right now, getting in line with the new regulations.

IF this is true, Vancouver is f***d big time. Can anyone confirm these financing rules?

p.s. Its also interesting to analyse these numbers from banks perspective. Apparently, banks are expecting big drops on houses above 1M to ask for such DP (trying to protect themselves, and asking 50% DP).

More Data Please
Guest
More Data Please
@bubbly: re: “…idiotic article…” Not an idiotic article! It’s a good article and false dichotomy both. Demand side incentives amount to a net tax on renters by transferring a benefit from renting taxpayers to home owning tax payers. Renters can’t get easy high leverage government insured loans for what they want to speculate on, why should home buyers get this benefit? Are renters some low rung on society that must be erradicated? How did a home loan benefit for war veterans morph into a system of discrimination against those who rent their shelter? Supply side incentives in the form of easier financing for certain types of housing, like purpose built rentals is a justifiable role for the CMHC if those types of buildings are in short supply. Also, keeping a smaller supply side CHMC in existence (not leaving a vacuum)… Read more »
Bull! Bull! Bull!
Guest
Bull! Bull! Bull!

@real_professional: ZOMG! 1.4% decline YOY! BEARS, THIS IS THE DAY WE’VE ALL BEEN WAITING FOR! IT’S JUDGEMENT DAY FOR COCS AND HAM! THIS YEAR IS DIFFERENT! A NEW PARADIGM!

N
Guest
N

@More Data Please:

“Renters can’t get easy high leverage government insured loans for what they want to speculate on, why should home buyers get this benefit?”

I’m no fan of the CMHC, but if we apply this logic across the board, you would have to eliminate government backed loans of all sorts. Banks get subsidized for mortgages because the government wants more people to buy houses and, from the government’s point of view, there are advantages to people buying houses. We can argue against the policy of promoting home ownership, but if our line of attack is, “it’s not fair,” then we have to argue against every government incentive out there.

More Data Please
Guest
More Data Please

@N: “…to argue against every government incentive out there…”

To be clear, I’m arguing against discriminatory and distorted lending for certain types of loans to individuals, not unequal allocation of benefits to individuals. If I was against socially useful benefits, I wouldn’t have advocated CMHC supply side support for purpose built rental buildings.

I also support government supply side incentives for road works projects but would oppose loan default insurance for purchasing private automobiles.

Anonymous
Guest
Anonymous

@asalvari1: “Its also interesting to analyse these numbers from banks perspective. Apparently, banks are expecting big drops on houses above 1M to ask for such DP (trying to protect themselves, and asking 50% DP).”

It looks like banks think prices will decline as much as 50%. Seems about right. I wonder where they come up with such predictions? Could it be the same bank economists who publicly state housing will never correct?

Remember always look at what people do, NOT what they say to determine how they really feel about something. We now know how the banks feel about housing going forward.

asalvari1
Guest
asalvari1

@Anonymous:

Hold on, not so quick

First, lets get some confirmation that this is real. We will know soon enough.

Second, asking for 50% DP on higher then 1M does not mean that the houses will fall for 50% nor it means that banks are predicting it. It just means that banks are seriously worried and they want extra insurance.

The real punch line is that the extra insurance is definitely going to make their worries materialize… how funny, protecting yourself from something that is caused by your protective action.

Turkey
Guest
Turkey

National Post: “Hard-pressed homeowners just close their eyes and borrow some more”.

And borrowers won’t really have anyone to blame but themselves. The warnings are out there. The examples are rife: all anyone has to do is examine the experience of U.S. homeowners over the past few years. The dangers aren’t a secret, they’re just being ignored.

But people keep borrowing, because it makes them feel good to spend, because they’re too busy to think about it, because they figure they can cover the payments in the short term and will deal with the future when it comes. And because they can always blame it on someone else when the roof caves in.

Bo Xilai
Guest
Bo Xilai

@More Data Please:

I’d love for the federal government to provide me with loan insurance for my margin account at TD Waterhouse. Then, TD would be able to reduce the % charged down to Prime.

asalvari1
Guest
asalvari1

@asalvari1: I apologize, my calculator was broken if used before the morning coffee:

Obviously, for 1.5M DP is 550K or for 2M house DP is 800K.

should be

Obviously, for 1.5M DP is 450K or for 2M house DP is 700K.

still, this is huge difference from the past where you could get in with 5% DP only.

1M used to be 50K new 200K

1.5M used to be 75K new 450K (200K or 20% on the first 1M and 250K or 50% on the last 0.5M)

2M used to be 100K new 700K (200K or 20% on the first 1M and 500K or 50% on the second 1M)

This are insane increases in the DP requirements.

Anonymous
Guest
Anonymous

@Bo Xilai: “I’d love for the federal government to provide me with loan insurance for my margin account at TD Waterhouse. Then, TD would be able to reduce the % charged down to Prime.”

You can do this with a HELOC. Just another silly thing CMHC insures.

Anonymous
Guest
Anonymous

@asalvari1: “This are insane increases in the DP requirements.”

To the contrary I would call them sane. The 5% down is insane.

TNT
Guest
TNT

The cartel is not in business to lose money.

mac
Member
mac

Have the Americans learned nothing?

http://tinyurl.com/99dawxc

“Krugman explained why offering relief to homeowners is so crucial for an economic recovery:
Loosely speaking, excess debt has created a situation in which everyone is trying to spend less than their income. Since this is collectively impossible — my spending is your income, and your spending is my income — the result is a persistently depressed economy.”

Wow. Your income is my income and vice versa, so you better get in more debt so I can afford to earn a living. Have we gone mad? You don’t want to spend less than you earn because if we all did it then how could we afford more stuff? You can see the madness that has crept into our alleged leaders.

Can't wait
Guest
Can't wait
@Turkey: Great article. It’s a direct attack against COC and the COC friendly media, and a total lack of personal accountability we all know is driving the COC phenomenon. “You can picture the headlines — “Canadians driven from their homes by rise in interest rates” – and the panic in Ottawa. The papers – well, some of them, anyway – would be full of stories about innocent families who insist they had no idea they were getting into such a mess when they took out the mortgage on their “dream home.” ” “New Democrats would be enraged. NDP leader Thomas Mulcair would probably find some way to blame it on Alberta or the Dutch Disease, or maybe both. But all those people (except Mulcair, of course) have been busy issuing warning after warning about the trouble we’re heading for. Mr.… Read more »
TNT
Guest
TNT

Is there anywhere to access the actual unspun numbers in various areas of Vancouver, North Van, West Van…. that give the amount that the market has dropped, price wise or % wise.
Im finding it difficult to get a straight answer.

kenny
Guest
kenny

@Can’t wait

I have sent that article to two COC’s this morning. No reply. Usually they reply to my email instantly but not this time. One is 80k heloc maxed an other is 5ok.

jesse
Member

@kenny: “COC”

Racist, dude. To me, “HAM” refers to where the money came from, not who the possessors of the money are. Unless “COC” means “Canadians On Credit”.

mclovin
Member
mclovin

Bull! Bull! Bull! is clearly rattled. His tone has changed. I guess the last Bull has been sent to the slaughter house.

Teranet – 1.1%
Closing costs -3.0%
Inflation -3.0%

Real Y/Y – 7.1%

Even that is a gross underestimation. I don’t think there is a Realtor out there who won’t admit the market is down at least 10% from its highs.

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