800 Billion dollar housing problem

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.

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Anonymous

they are dumb but i cant not believe bears are this dumb. whatever the default rate is, it`s not 100% or $800bil on the hook, isnt it! stupid bears think the entire country homeowners would walk out the door and be homeless. are you bears still hiding under your bed waiting for 21 dec 2012!

patriotz

VDTF: “I think Teranet will be -3%, and inventory will peak at 21250.”

Thanks for coming out with a hard prediction for 2013. I’m going to double down yours – Teranet will be -3% YTD on or before the June numbers, and the December numbers will be -6% YTD. At least.

[…] -Regulator targets bank risk in 2013 -The fight for deposits -LePoidevin / Rabidoux talk video -Down is the new flat -Drivers licenses are too easy to get -Computers get house prices wrong -US: worst holiday sales […]

GNFINGR

Maybe BPOM answered this question in #35, but do listings get busy in early Jan? I was thinking about this; would a seller want to list early and beat the other spring listers, but at the risk of listing too early and having the house stagnate on the market, if the buyers havent started looking yet?

Best place on meth

God damn it, over 200% sell list today.

We’re doomed.

Oh wait, listings explode like a neutron bomb starting Wednesday.

Man, this is going to be fun.

Achilles HELOC

@ Makaya

It’s so flat…it’s like the way the earth seems flat, until you see it from space. Long live the flat earth society.

No Noise

Forgot to add – under this scenario, rents would be depreciating as well..

No Noise

@#23 C.Junta

Sure, you’re right. But I’d rather just be paying more income tax than higher property taxes on a depreciating piece of RE as well.

Short'em High

chilled Says: December 27th, 2012 at 9:25 am …real issue is ‘what are we going to do about the 800 billion dollar housing problem… If the federal NDP would grow a pair in Finance, they would push to have that $800B added to F’s defacto national deficit number. F’s so called national debt pay down schedule is a rubbish talking point in light of the Enron style $800B off-the-book loss. http://www.nysscpa.org/enron/overview.htm Bull! Bull! Bull! Says: December 27th, 2012 at 1:41 pm …passed out of favour because they were wrong for too long… RE: Wrong too long vs. Dumb Estate. It all depends when people finally need their money. This can keep going a long time. It can even continue beyond expiry of the relevant equity options. See point #1 about Canadian politics. If the NDP wakes up to the +$800B… Read more »

Makaya

I think someone just overpaid.

Anybody that bought within the past 5 years (or more) overpaid…

Someguy

3721 W 16th has a bus stop up a steep grade right in front of it. Best soundproofing in the world won’t save it from the rumble. House is close to the street.

First bus at 5:34 AM, and every 3(yes 3) to 30 minutes (averages about 12) all day until 11:54 PM.

Having lived by bus stops, I can say that house would be a nightmare to live at. I think someone just overpaid.

Village Whisperer

– Do you have the address of the property that sold in Point Grey?

jay

Two for one sale (two lots):
http://www.ecorealtyinc.ca/listing?id=259665180

The price used to be $3,200,000, now $2,180,000 (-32%).

It looks like a failed flip (the property changed hands a year ago).

Makaya

News from the trenches, courtesy of HAM at RET:

3721 W16th – Asking $1.288M. Sold for $1.030M. Assessed north of $1.2M

Similar sales include:

4583 W16th – Asking $1.098M. Sold for $1.18M in Jan/11.
4067 W16th – Asking $1.198M. Sold for $1.185M in Feb/11.
4591 W16th – Asking $1.249M. Sold for $1.260M in Sep/11.

All those purchasers must be kicking themselves. They could have saved up for another year and bought for $200K less.

That’s what a flat market looks like, apparently…

Anonymous

…unwilling or unable to pay for the privilege of living in the Best Place on Earth!…

‘Privilege’, right! ‘Super privileged’ must mean you get to live under water, instead of just constantly wet like those that are ‘privileged’.

Used to be only Toronto folks had to put sun screen on their calves.

yvr2zrh

there was a sale today in Point Grey . Almost 300K below assessed. Almost broke the 1.0M mark . . Sold fo $1,030 . . It was a demographic that is always motivated – – An Estate sale.

Just saying that these are out there and these will always set the new price to the extent there are no buyers.

C.Junta

@No Noise #18
>Good time to be a renter
I would say, bad time to be a Canadian taxpayer.

paulb

New Listings 41
Price Changes 34
Sold Listings 87
TI:14388

http://www.paulboenisch.com

Anonymous

Re. #8

“Vancouver real estate prices are depressiating, and will continue to do so for the foreseeable future.”

Totally agree! Vancouver prices are depressing and will remain so for those unwilling or unable to pay for the privilege of living in the Best Place on Earth!

Or did you mean to say “depreciating”? Either way, prices will remain depressing for you guys. Happy New Year Bears! It will be 2009 all over again!

No Noise

@19 Anonymous

Miserable? Bears have never been happier these past 6 months I would think. And the future looks bright too!

Anonymous

“our year“

hahaha, welcome to another year in the miserable bear club.

No Noise

@#6 Painted Turtle

The G&M article says that the $800B mortgage risk problem Canada (CMHC) has is “too big to fail”. Therefore taxpayers will be on the hook for it if RE prices continue to drop – hence taxes will rise (including property taxes I would assume)- hence RE will further decrease as will overall economy – vicious cycle. Good time to be a renter..

Vote Down The Facts

Yalie,

I think Teranet will be -3%, and inventory will peak at 21250.

Bull! Bull! Bull!

Ben Rabidoux is the bear de jour. Let’s see if we can come up with a list of other bears that have since have passed out of favour because they were wrong for too long.

I’ll start – David Rosenberg.

Yellow Helicopter

@14 – gokou3 –
Thanks very much for this! I was one of the many that wanted to attend and couldn’t.

ALL – I really appreciate your contributions to this site. I don’t always feel like I have much to offer / add,so I am a seldom commenter, but I have learned so much from you and thank you for not only helping me keep sane in the face of this crazy RE market, but also make more informed financial decisions. I think 2013 will be ‘our’ year. Thanks again.