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.

39 Responses to “800 Billion dollar housing problem”

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    We all know about this CMHC boondoogle, talk about flogging a dead horse.

    For the last 8yrs the G&M flip flops on it’s housing position and when the final result is tallied be sure to expect their editorial “genius’s” to say; see, we were right, simply because they were all over the map.

    The real issue is ‘what are we going to do about the 800 billion dollar housing problem?’

    Most definitely? Nothing.

    Well-loved. Like or Dislike: Thumb up 33 Thumb down 0

    Shiller speaks about latest housing numbers…hesistant to call a bottom.

    http://www.bloomberg.com/video/housing-long-term-outlook-is-fuzzy-shiller-says-9DAkjK_wQ~Sf8dFOBSZo4Q.html

    Hot debate. What do you think? Thumb up 13 Thumb down 9

    Can't wait Says:
    3

    >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.

    Some COCs gonna get hurt, real bad!

    Well-loved. Like or Dislike: Thumb up 22 Thumb down 2

    This is the form of government intervention that I hate the most. It’s one thing for a government to provide stuff that nobody else will (free healthcare, welfare, an army, etc), but when a private entity sees a way to make money, wtf would the government try to compete with it? They could have just let the private sector offer those dumbass insurances and keep insuring 25 years/low debt-to-income mortgages and stuff like that. So what if 10 years down the road you’re not insuring a single mortgage? I’d say Good, mission accomplished. Now stick to compiling statistics.

    To me it feels like if someone invented a perfect health pill, and you’d see the government breaking arms and legs to fill hospitals. Defense spending went down after the cold war, UI spending go down when unemployment rate go down. Wtf is it s different at chmc?

    Well-loved. Like or Dislike: Thumb up 47 Thumb down 0

    Canada’s last truly private mortgage insurer, Mortgage Insurance Corporation of Canada, went bankrupt decades ago.

    The ostensibly private mortgage insurers in the US have become wards of the state. Private capital is still not willing to insure high ratio mortgages in the US – where prices are 1/2 those in Canada and beginning to go up.

    This is the free market speaking. It’s speaking in the loudest possible way that OUR RE PRICES ARE MUCH MUCH TOO HIGH.

    Without the government continuing to hold the bag on mortgages RE prices in Canada would drop below those in the US. Flaherty knows it, the banks know it, the RE industry knows it, and we know it.

    Well-loved. Like or Dislike: Thumb up 66 Thumb down 4

    painted turtle Says:
    6

    Re: G and M article: 800 billion dollar housing problem.
    Can someone tell us in one or two lines what it deals with? I haven’t paid my G and M subscription yet.
    Thanks.

    Like or Dislike: Thumb up 2 Thumb down 5

    WSJ: Canada’s Bank Regulator Targets “Operational Risk” in 2013

    Dec 27, 2012
    Canada’s top financial watchdog intends to press the big banks next year on how well prepared they are to deal with so-called “operational risk”–one of the most difficult risks to protect against.

    “We think it’s becoming a much bigger risk, and it’s related to the fact that banks everywhere are in a cost-cutting mode, so they’re trying to do more with less, and that does increase risk,” Julie Dickson, the head of the Office of the Superintendent of Financial Institutions, told Canada Real Time in an interview earlier in December.

    Hot debate. What do you think? Thumb up 8 Thumb down 4

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

    The extra $50 billion the Feds are sinking into the market will merely allow overextended developers to dump some of their overpriced inventory. This majority of this money will probably end up in the Toronto condo market— just as the finance minister hopes.

    It is sad, but the government has implicitly admitted that providing marginal lenders with tax payer guarantees is the only way to keep this ponzi scheme alive. But, it’s a discrace that they are willing to facilitate the financial slaughter of thousands of young people for the benefit of the real estate industry.

    Well-loved. Like or Dislike: Thumb up 40 Thumb down 4

    Many Franks Says:
    9

    For anyone wondering how the additional $50B for Genworth differs from a similar lift on CMHC, there is a post at Canadian Mortgage Trends detailing the differences:

    The government backs CMHC insured mortgages 100% if CMHC fails. AIG and Genworth, however, receive only 90% federal backing.

    To some people, that 10% difference may not seem like much, but in today’s gun-shy credit market, it’s the world.

    There’s more detail following that.

    A few parts of the article had me rolling my eyes — Rob actually hoped that the fed would raise private insurer backing from 90% to 100% — though it appears his primary concern was making private insurers more competitive with CMHC. Another way to go about that is to handicap CMHC, which is what ended up happening thanks to the cap.

    Basically, Genworth’s got a pretty solid federal backstop, and raising their cap does raise taxpayer exposure — but better Genworth than CMHC, I suppose, if Flaherty really felt the need to let his belt slip another notch. And I really doubt Genworth is dumb enough to turn this around and declare open season on Vancouver lending.

    Well-loved. Like or Dislike: Thumb up 24 Thumb down 4

    @Many Franks

    Good summary. And yes that 10% does make a world of difference.

    Will This increase help Vancouver RE? Doubtful. From what I understand Genworth Canada not interested in BC at this time. Too much risk. Their main focus is, and has always been Toronto. Of course, Toronto is the next house of cards to fall (though most def was not as pumped up as Van. Still won’t be pretty though.

    Hot debate. What do you think? Thumb up 21 Thumb down 3

    Anonymous Says:
    11

    I don’t see much change in the new assessment, as it is based on the market of last July. Few sales and little price changes then in Van west.

    Like or Dislike: Thumb up 8 Thumb down 0

    Bull! Bull! Bull! Says:
    12

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 8 Thumb down 24

    Thanks Many Franks. And we all know how accurate predictions made on this site are, don’t we

    Think you can do better? In that case, why don’t we all make our 2013 predictions, and see who’s in fact more accurate?

    I’ll start: I predict that between Dec 2012 and Dec 2013, the Teranet index will be down 15% for Vancouver.

    What’s your forecast?

    Well-loved. Like or Dislike: Thumb up 34 Thumb down 4

    Video link to Ben’s presentation in Vancouver for the LePoidevin Group:

    http://youtu.be/pagbjwKJyV4

    Well-loved. Like or Dislike: Thumb up 24 Thumb down 0

    Yellow Helicopter Says:
    15

    @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.

    Well-loved. Like or Dislike: Thumb up 33 Thumb down 4

    Bull! Bull! Bull! Says:
    16

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 15 Thumb down 25

    Vote Down The Facts Says:
    17

    Yalie,

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

    Hot debate. What do you think? Thumb up 14 Thumb down 0

    No Noise Says:
    18

    @#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..

    Hot debate. What do you think? Thumb up 22 Thumb down 7

    Anonymous Says:
    19

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 7 Thumb down 16

    No Noise Says:
    20

    @19 Anonymous

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

    Hot debate. What do you think? Thumb up 20 Thumb down 3

    Anonymous Says:
    21

    Hidden due to low comment rating. Click here to see.

    Poorly-rated. Like or Dislike: Thumb up 4 Thumb down 15

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

    http://www.paulboenisch.com

    Well-loved. Like or Dislike: Thumb up 75 Thumb down 2

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

    Hot debate. What do you think? Thumb up 17 Thumb down 0

    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.

    Well-loved. Like or Dislike: Thumb up 45 Thumb down 1

    Anonymous Says:
    25

    …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.

    Hot debate. What do you think? Thumb up 4 Thumb down 6

    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…

    Well-loved. Like or Dislike: Thumb up 47 Thumb down 3

    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).

    Hot debate. What do you think? Thumb up 19 Thumb down 0

    Village Whisperer Village Whisperer Says:
    28

    @yvr2zrh – Do you have the address of the property that sold in Point Grey?

    Like or Dislike: Thumb up 2 Thumb down 0

    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.

    Well-loved. Like or Dislike: Thumb up 22 Thumb down 1

    I think someone just overpaid.

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

    Hot debate. What do you think? Thumb up 22 Thumb down 4

    Short'em High Says:
    31

    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 defacto deficit, it becomes an election issue. I’m not a rabid NDP’er, but I don’t want to pay for these CMHC kiting assholes either. Given a choice, I’ll vote for whatever party will put the burden of this debt on the beneficiaries of this fraud as will most people with rational personal finance.

    Hot debate. What do you think? Thumb up 12 Thumb down 7

    No Noise Says:
    32

    @#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.

    Like or Dislike: Thumb up 2 Thumb down 0

    No Noise Says:
    33

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

    Like or Dislike: Thumb up 2 Thumb down 0

    Achilles HELOC Says:
    34

    @ 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.

    Like or Dislike: Thumb up 2 Thumb down 0

    Best place on meth Says:
    35

    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.

    Well-loved. Like or Dislike: Thumb up 39 Thumb down 4

    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?

    Hot debate. What do you think? Thumb up 8 Thumb down 3

    [...] -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 [...]

    Like or Dislike: Thumb up 1 Thumb down 0

    patriotz patriotz Says:
    38

    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.

    Hot debate. What do you think? Thumb up 10 Thumb down 0

    Anonymous Says:
    39

    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!

    Like or Dislike: Thumb up 0 Thumb down 4

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