Think home prices are a touch high in Canada?
Concerned about falling house prices and the spin-off effects on the larger economy?
If you’re looking for an outline of the way the federally run Canadian Mortgage and Housing Corporation (CMHC) took part in a reckless race to bottom against US competition and put the Canadian economy at risk you could do a lot worse than this Globe and Mail article .
Created in 1946 to help returning Second World War veterans find homes, CMHC had morphed over the years into a multibillion-dollar goliath that fuels bank lending and housing demand by insuring riskier mortgages, especially those in which the buyer has only a small down payment. Without that insurance, many more people would be shut out of the real estate market, unable to get a mortgage from a chartered bank.
It has also been a lucrative venture for the government. But that business was now being eroded as a result of the arrival of aggressive U.S. insurers into Canada.
The American companies were willing to do things CMHC had never done. Some were even backing “zero-down” mortgages in which the buyer borrowed every dollar needed to pay for the home.
Fortunately as fiscally responsible Canadians, we didn’t follow the US example and start backing ‘zero-down’ mortgages.. Oh wait, actually we did. In fact the CMHC was a little late in its turn around, only starting to pull back the changes after it was obvious the US economy was tanking due to the bursting of a housing bubble.
So how much did the CMHC influence the rise of Canadian house prices? That’s the source of much debate, but as the G&M puts it:
What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.
I’m going to stop myself now, because I could just keep quoting from this article. If you have any questions about the role the CMHC has played in the Canadian housing bubble do yourself a favour and read the full article.