Here in Canada, we seem to think we are immune to a housing bubble, so it was interesting to see the Globe and Mail – usually a real estate cheerleader – at least question the logic of why we continue to experience a booming housing sector amid the greatest economic crisis since the Great Depression. In an Oct. 30 article, the Globe wrote, “Canadians are in the midst of a mortgage binge, taking out home loans at a pace that’s nearly eight per cent faster than a year ago…housing prices don’t usually survive recessions.” While the article correctly points to the Bank of Canada’s record low interest rates as a primary culprit for the buying spree, nowhere in the article does it mention the other major culprit: the Canada Mortgage and Housing Corporation.
Too big to fail? The CMHC provides insurance to the banks for the entire amount of any mortgage when the purchaser has less than a 20 per cent down payment. This is another way of saying that they insure virtually all mortgages, since the average down payment of Canadians who buy a home is only about six percent. With this CMHC guarantee, the banks have no risk when they issue mortgages. If the homeowner defaults, it is the taxpayer who is on the hook. We don’t have a name for “sub-prime” here in Canada because we don’t need one – the CMHC makes almost everyone a worthy borrower. Some are starting to call the CMHC the northern version of Fannie Mae and Freddie Mac. By the end of 2009, the CMHC says it plans to insure a staggering $813 billion worth of mortgages and mortgage-backed securities. That is well over half of Canada’s entire GDP. If there is a northern version of “too big to fail”, the CMHC is it.
An untold story The National Post’s Diane Francis, the only mainstream journalist I know to call out the CMHC, warns that “Ottawa’s smugness about its superior regulatory regime and Canadian banking conservatism” is an accident waiting to happen. “It’s a mortgage slush fund which distorts the market,” Francis writes. “It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone.”
Worse than America One of the most astute observers of this quiet Canadian housing bubble is blogger Jonathan Tonge (www.americacanada.blogspot.com). Here s what he has to say: “Even at the zenith of the US housing bubble, prices peaked around $230,000 US while incomes were around $47,000 US. In Canada, incomes are $44,000 and prices are now at $326,613. If I have evidenced to you at this point how risky our lending has been, how are we so different than America? One might even say that we are much worse.” The voices that recognize we are indeed in a housing bubble are few and far between. It won’t be long before the rest of the public catches on.