Government Is To Blame For Canadian Housing Bubble.

[SethM]

Government is to blame for Canada’s housing bubble
Jesse Kline Apr 23, 2012 – 2:45 PM ET

http://fullcomment.nationalpost.com/201 ... ng-bubble/

Canada’s housing market has been relatively stable over the past year, with the notable exception of Toronto, which has overtaken Vancouver as the country’s hottest real estate market. Prices in Canada’s largest city have risen 10.5% over the past year and there are now three times as many cranes dotting Hog Town’s skyline as there are in the Big Apple.

Many analysts are becoming increasingly concerned that some cities — notably Toronto, Vancouver and possibly Calgary — are in the midst of their own U.S.-style housing bubble. A document written by the country’s financial regulator and obtained earlier this year through an access to information request, expresses concern over the “emerging risk” of Canadian loans that “have some similarities to non-prime loans in the U.S. retail lending market.” Bank of Canada Governor Mark Carney continued to sound the alarm as well last week over the growing level of household debt, while maintaining the overnight lending rate at a near-record low level of 1%.

The question remains as to why prices in Toronto and Vancouver — where the economy is stagnant — are rising so fast, and not in cities like Edmonton and Saskatoon — where the economy, and population, is booming. Financial Post columnist Diane Francis caused quite a stir recently, by arguing that the Canada Mortgage and Housing Corporation’s (CMHC) policies have led to a “deluge of hot money from abroad that is creating an artificial and potentially dangerous real estate bubble.” Her solution: “A ban on foreign buying of residences.”

Ms. Francis is at least partially correct. The CMHC controls a majority of our mortgage insurance and securitization markets, and guarantees 100% of the principle and interest on insured residential mortgages. Meanwhile, the Bank of Canada has maintained interest rates at artificially low levels, which only serves to temporarily inflate the market, instead of allowing any correction that would take place under normal market conditions. These two policies make Canadian real estate a very attractive investment — for both foreign and domestic buyers.

But saying that foreigners are wholly responsible for creating a housing bubble is nothing more than fear-mongering, with people who don’t look or sound like us, being cast as the boogeyman. After all, what’s wrong with foreign investment? Foreigners bring money into the country, which creates jobs and drums-up business here at home. Developers make money, construction companies hire employees and buy capital equipment, the rental supply increases and local businesses profit the whole way through. It’s a win-win for everybody.

The Statue of Liberty calls for “your tired, your poor, your huddled masses.” If we were smart, we’d engrave the CN Tower with a call for “your innovations, your money and your wealthy investors.” We should want to be known as a country that welcomes investment.

What we don’t want is an artificially inflated housing market that will bring the whole economy crumbling down when the bubble bursts (see the United States, circa 2008). But if some parts of Canada are indeed in the midst of a housing bubble, the blame can be placed squarely on government policy.

By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans. And although the government has tightened lending standards recently and may do so again in the near future, a report from the Reason Foundation in the U.S. found that government guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Government simply cannot price risk accurately; while private lenders, if unencumbered by market-distorting policies, have every incentive to price risk appropriately.

In order to prevent a U.S.-style housing bubble, we should not hang a “closed” sign on our border and prevent inflows of capital; we should instead push to privatize the CMHC and allow private companies to assume the mortgage risk, instead of the taxpayer. We also need a monetary policy that allows interest rates to rise and fall with market forces, instead of at the whim of central planners.

Only by removing policies that artificially inflate the market in the short term, will we be able to create a real estate market that is sustainable in the long run.

National Post

[Taipan]

Yes it is. As usual you are being lied to. The same issues that hit the USA, has happened to you.

Same pig, different lipstick.

Go grab a copy of this very interesting read. Change the names, same MO in Canada. Your freedie mac and fannoe mae was chmc!

$2 - best thing you could read to understand how much crap you are in.

All the Devils Are Here: The Hidden History of the Financial Crisis

Where did i hear about it? Recommended by Kyle Bass, somebody who has made hundreds of millions out of debt bubbles and defaults world wide.

And Vancouver in particular has one.

[eyesthebye]

The question remains as to why prices in Toronto and Vancouver — where the economy is stagnant — are rising so fast, and not in cities like Edmonton and Saskatoon — where the economy, and population, is booming

immigration immigration immigration immigration immigration

immigrants not moving to Saskatoon or Edmonton in large numbers.

Investor class immigrants not moving to Saskatoon or Edmonton. Actually being accepted to Quebec's investor immigrant program and moving to Vancouver.

How is this so hard to understand?

[eyesthebye]

“deluge of hot money from abroad that is creating an artificial and potentially dangerous real estate bubble.”

how is one related to the other. I don't understand this. Are foreigners taking out loans that are insured through CMHC? I don't think so

[Austin]

whocouldanode?

Talk about such an obvious trial balloon. L - O - F - L

[Austin]

"We also need a monetary policy that allows interest rates to rise and fall with market forces, instead of at the whim of central planners"

OK that's a dumb **** idea. The market cares NOTHING about people. I'm sure from an efficiency point of view, that's a great idea, but from a democratic point of view, where you know, we actually do care (at least a little bit) about people regardless of how they contribute to the market, it's a dumb idea.

[Austin]

sigh, hard times ahead. But.. you know, I (and a couple of others) called this several times over the last few years. CMHC was the conservative ticket to majority, and now that they have it, they're going to turn off the spout.

I'm just wondering what's taking them so long.

[thirdlittlepig]

After ten years of rampant expansion of CMHC, Flaherty suddenly comes on tv looking all solemn-faced about how he wants to regulate CMHC better. THe gov't has been riding on the coat-tails of a fat mortgage market, becoming ever more obese year by year, now it's going to put it on a wee diet. it will take years to dig out of the excess debt that canadians have signed up for (25-30 to be exact). You can't unring the bell now.
And I take personal exception to the pig references, Taipan. Pigs only eat what's provided, they can't help themselves if someone keeps putting too much in front of them. It's not their fault it's just their nature.

[timber2012]

“deluge of hot money from abroad that is creating an artificial and potentially dangerous real estate bubble.”

how is one related to the other. I don't understand this. Are foreigners taking out loans that are insured through CMHC? I don't think so

out of curiosity, you don't think the artificially low interest rates and lax mortgage policies contribute to our high prices?

[eyesthebye]

“deluge of hot money from abroad that is creating an artificial and potentially dangerous real estate bubble.”

how is one related to the other. I don't understand this. Are foreigners taking out loans that are insured through CMHC? I don't think so

out of curiosity, you don't think the artificially low interest rates and lax mortgage policies contribute to our high prices?

to some extent, but not as much as some are arguing.
Detached buyers are not financing the entire amount of their purchase so interest rates are less relevant as one moves upward on the property ladder. If you use simple math and fomulas to apply to all buyers then you can quite easily draw this conclusion - but some buyers are using 100s of thousands of $ as downpayments for their purchase. Wealth is afoot here in Vancouver in the detached market.

[timber2012]

how is one related to the other. I don't understand this. Are foreigners taking out loans that are insured through CMHC? I don't think so

out of curiosity, you don't think the artificially low interest rates and lax mortgage policies contribute to our high prices?

to some extent, but not as much as some are arguing.
Detached buyers are not financing the entire amount of their purchase so interest rates are less relevant as one moves upward on the property ladder. If you use simple math and fomulas to apply to all buyers then you can quite easily draw this conclusion - but some buyers are using 100s of thousands of $ as downpayments for their purchase. Wealth is afoot here in Vancouver in the detached market.

I disagree - last time prices sharply declined in the city was when banks tightened their lending and nobody could get financing. It turned around when this policy loosened again.

Sure there is wealth but wealthy people get wealthy by being savvy with money. If they smell blood, they don't rush in to catch falling knives. They let 'others slow down the knife and pounce when they feel safe.

Just my $0.02

[eyesthebye]

After ten years of rampant expansion of CMHC, Flaherty suddenly comes on tv looking all solemn-faced about how he wants to regulate CMHC better. THe gov't has been riding on the coat-tails of a fat mortgage market, becoming ever more obese year by year, now it's going to put it on a wee diet. it will take years to dig out of the excess debt that canadians have signed up for (25-30 to be exact). You can't unring the bell now.
And I take personal exception to the pig references, Taipan. Pigs only eat what's provided, they can't help themselves if someone keeps putting too much in front of them. It's not their fault it's just their nature.

in 2003 CMHC removed the ceiling on home price purchases. This was probably long overdue given the normal price appreciation of Canadian real estate.

in 2007 CMHC made it possible to ammortize a home purchase over 35 years, then a few months later this was increased to 40 years.

Since March of 2011 the government scaled ammortization lengths back to the original 30 year limit.

What else would you like them?

Government will not increase interest rates as they're paying off their own loans. Furthermore, with our $CDN worth more than $US there's no way our rates will climb without US rates climbing first. So let's exclude rate hikes as part of the remedy - government will not do it.

What next?

[eyesthebye]

"timber2012"
I disagree - last time prices sharply declined in the city was when banks tightened their lending and nobody could get financing. It turned around when this policy loosened again.

last time prices declined in Vancouve was 2008

Chinese millionaires in 2008 = 414,900
Chinese millionaires in 2012 = 960,000

Also check Chinese gov't policies if you want to know why there is a sense of urgency for Chinese to get their money out of the country.

Be grateful. The wealth in India is also growing at an astounding rate but so far Vancouver doesn't seem to be the primary destination of choice

[registered]

I'm just wondering what's taking them so long.

Finding a clever scapegoat outside of normal public view. Today they announced the CMHC goes under OSFI oversight:

http://business.financialpost.com/2012/04/26/osfi-to-supervise-cmhc/

Mission accomplished.

[thirdlittlepig]

After ten years of rampant expansion of CMHC, Flaherty suddenly comes on tv looking all solemn-faced about how he wants to regulate CMHC better. THe gov't has been riding on the coat-tails of a fat mortgage market, becoming ever more obese year by year, now it's going to put it on a wee diet. it will take years to dig out of the excess debt that canadians have signed up for (25-30 to be exact). You can't unring the bell now.
And I take personal exception to the pig references, Taipan. Pigs only eat what's provided, they can't help themselves if someone keeps putting too much in front of them. It's not their fault it's just their nature.

in 2003 CMHC removed the ceiling on home price purchases. This was probably long overdue given the normal price appreciation of Canadian real estate.

in 2007 CMHC made it possible to ammortize a home purchase over 35 years, then a few months later this was increased to 40 years.

Since March of 2011 the government scaled ammortization lengths back to the original 30 year limit.

What else would you like them?

Government will not increase interest rates as they're paying off their own loans. Furthermore, with our $CDN worth more than $US there's no way our rates will climb without US rates climbing first. So let's exclude rate hikes as part of the remedy - government will not do it.

What next?

People who bought in the last ten years have seen a nice appreciation of their home value, and enjoyed a substantial break on interest rates. So I think they can afford a percent increase in rates as mortgages renew (break it in gradually). They've been warned for a couple of years now to get their affairs in order. If the regulators don't do this soon there is the risk that people will begin to think they are just calling "wolf" and will just continue to rack up more debt. "Emergency" rates should be reserved for "crisis" intervention. By definition that means a relatively short term fix, not something that was meant to carry on for years and years. CMHC was supposed to originally be a means of helping ordinary folks buy a home with affordable mortgages, not a giveaway program for people wanting to ride a real estate boom while homes double in price in ten years. It WAS working nicely up to the last decade, and then it got sadly abused, and more so every year. It has become an insatiable monster which no one has the courage to put on a teeny weeny calorie reduction program. One percent. Homes have increased 50-100%. Way out of whack from wage increases at a couple percent per year. The economy need some balance.