Do We Still Have a Housing Bubble?

I came across this article over at The Tyee on CMHC (Canadian Mortgage and Housing Corporation) which granted does contain a few over reaction statements but does contain some interesting data on why our real estate market only had a slight correction rather than the fall in the US.  Basically the argument goes that we are just sitting on a housing bubble funding by CMHC which puts us the taxpayers on the hook if this bubble bursts.

First a little history lesson, recall back in 2007 when 0% down payment and 40 year mortgages were introduced.  This fulled the initial rush into the housing market until August 2008 when those rules were scaled back to 5% down payment and 35 years.  You would have though the banks would have got some of that risk right? Actually the banks mortgage debt from the start of 2007 until Jan 2009 has grown by a mere 0.01%, so that means almost every mortgage in Canada from 2007 to 2009 was backed by CMHC.   Then guess what CMHC has been packaging some of those loans up and selling them off in pools (if this sounds familiar it should Mortgage Backed Securities is what caused a lot of this mess in the US).  So if people fail to pay their huge mortgages the banks are off the hook, but CMHC picks up the tab and CMHC is government backed.  So in the end we the taxpayers are on the hook.

If your curious how big of an issue this is let’s look at the dollars.  In 2007 the CMHC had $138 billion in mortgages or about 17.8% of all mortgages.  By June 2009 CMHC had $290 billion in mortgages and the government has raised it’s leaning limit again from $300 billion to $600 billion since CMHC is predicting they will have about $500 billion in mortgages by the end of 2010.  Currently CMHC has issued $114 billion of those loans as guarantee pools.  Also keep in mind at the end of 2008 the net federal debt was about $480 billion.

Now this is the important bit, CMHC is not a bank.  Therefore those wonderful conservative regulations that our banks have had praise for from around the world don’t apply to CMHC.  Effectively meaning if the real estate market goes south on us that $56 billion deficit this year is starting to look damn small.  Are you starting to get a little bit nervous?  Good because so am I.

So what can the government do about this potential mess?  Well so far they have done almost nothing (other than back away from those 40 year mortgages).  After all things are going well so it’s not a big deal.  Yet if they tried to tighten the mortgage rules back down to a maximum of 30 years you cut off the new home buyers, you do that and construction falls and the economy slows even further.   If that happens mortgage defaults could go up.  You can see the bind that they are in.  If they try to fix it they would likely burst the bubble if they do nothing the bubble could keep growing.

So what do you think?  Do we have a problem or not?  If so what can we do about it?

11 thoughts on “Do We Still Have a Housing Bubble?”

  1. We have a huge potential problem with many living well beyond their means. Housing is only one part of the problem. Add in cars, trips to Mexico, electronics etc.

    The best one can do is learn to live frugally and save as much you can. This gives one a safety factor against the worse case scenario.

  2. I don’t have a problem with long mortgage terms, as long as they stay single-generation (not the multi-generational 100-year mortgages in Japan). If Someone wants to pay off their mortgage for the rest of their life and pay hundreds of thousands more in interest, that’s their uninformed prerogative. They become even less of an issue if you allow solid anniversary payments or other means of paying them off early with minimal penalty.

    But I do have an issue with low down-payment allowances. 0% is ridiculous, as is 5% with 5% cash back (essentially 0%). Forcing CMHC payments on anything under 20% is a good incentive to raise more of a down payment, but I think anything less than 10% should make a mortgage very difficult to get. The down-payment is the best means of determining if you’re ready to own a home – if you’ve been able to save enough for a significant DP, then you’ve shown at least some ability to live within your means.

  3. Unfortunately the merry-go-round has to stop somewhere. I’m in favour of putting the minimum down payment up another notch to 10%, on the theory that stopping the inflation of the bubble sooner is better than later. Of course, I’m not seeking re-election.

    At the very least increasing the CMHC insurance premium to more accurately reflect the risks would be nice. That could also solve the problem of having a country-wide policy for local issues. For instance, there is a much greater potential loss facing someone buying in Toronto or Vancouver right now than someone buying in Charlottetown, yet the mortgage insurance for all 3 would be 2.75% with the minimum down payment.

  4. Well, the government is part of the problem and they have actually done something- they keep raising the CMHC insurance limits.In essense, open oil tank, find fire and pour repeatedly.

    We are cycling now in a consumption loop. The government’s only response to a bubble collapse based on over-consumption is to encourage more consumption rather than stimulate output and industrial production growth.

    A housing bubble, whether you believe it or not, is only a small part of a larger problem. We collectively refuse to make the scarfices necessary to re-orient our economy producing rather than consuming.

  5. I think there is definitely a huge bubble in housing, the only reason it didn’t completely deflate is low interest rates.

    CMHC is a moral hazard. What do the mortgage brokers, banks or other lenders care about the quality of their loans? The entire amount is back stopped by the government. They have nothing to lose, and consumers are pretty well unaware of the risks they take on because the CMHC premiums are just amortized right into the loan, they feel no financial consequence for their risk taking behavior.

    Furthermore CMHC was setup to increase lending, but now is rather unnecessary, there are private lenders that offer loan insurance. If private providers want to back risky mortgages that’s their own problem, GenWorth (GE) financial is feeling the pain of lowering their fees and creating new riskier lending programs like 40 year mortgage terms.

    CMHC has forgotten it’s mandate to help Canadians afford housing. They didn’t like losing market share to private insurers so they began competing with them. And why not lower insurance fees and offer insurance on riskier loans? They are backed by the government, they have nothing to lose!

    At this rate CMHC will soon become larger then some of our national banks. CMHC is sucking up huge amounts of the stimulus package to prop up the housing bubble.

    Housing prices are market driven, so by letting people take bigger loans with with less down and lower requirements all it does is add more buyers to the market, then prices go up for everyone.

    It’s supply and demand, more buyers with more money = higher housing prices, and less affordability… exactly what CMHC was created to help fight.

  6. First, I appologize for all mistakes: I am not fully bilingal (my ML is French). I’ll try to do my best 🙂

    I do own a 40 years, 0 downpayment mortgage. And honestly, I do have a very hard time financially as I explain on my blog.

    I didn’t knew about what SCHL was doing with our mortgage. Now I know that I didnt really understood what the bank «sold» us to be «the best mortgage we can have». Anyways. What we are doing is that we opted for accelerated weekly payments. Instead of paying monthly 1350$, we pay 380$ weekly.

    That means that over a year, we pay 19 760$ in mortgage instead of 16 200$ (3560$ more only on capital). I would like this to be better, but right now it’s the best we can do. What it makes is that if our current interest rate doesn’t move, we will pay our house in somewhat 26-27 years instead of 40 years.

    Why did we chose that kind of mortgage? Because houses prices are so high, it’s almost impossible to put aside a significant downpayment. What we did was we kept our money for downpayment to make necessary renos on the house: we added an income, so we hope when we will sell it that we get our money back and be able to put some cash on our next home. According to current market, we would be able to ask at least 60 000 more than what we paid when we bought this house. We plan to sell it within 18 months, and move to something smaller.

    I just hope nothing crashes by this time…

  7. My wife and I vow never to have a mortgage again after we pay this one off. We have a GIC maturing in 2012 just before the current term on our mortagage expires, and with that GIC (which gets a juicy 5.25% in its final year) we will pay it off. Should we ever decide to ever upgrade from our condo to a townhouse we will make up the difference with cash we have saved… we’re done with mortgages.

  8. Well what do you know. Even the major columnists over at the National Post have picked up on this story.

    Thanks for the comments everyone. I think the 5% down should be cash, not cash back. You should be able to demonstrate some ability to save prior to getting a mortgage. After all that will keep people from over paying so much on housing. If you can’t afford the $20,000 down payment you won’t be buying that $400,000 house.


  9. Thanks for the link. In fact in our case we bought a 250 000$ income property and had some money aside, but the bank told us that because we didn’t have 25% for downpayment, ANYWAYS the CMHC will have to insure our mortgage, and we would pay the same fees with or without downpayment.

    So… the bank discouraged us to give a downpayment because obviously it was better for THEM to attach us 40 years. Now I see it because I am less naive…I learned something at least!!! But one thing is sure: I would never be able to do a job such like the bank counselor did with us, lying in our faces like that… yikes…

    Next time I will give a downpayment, even if it’s only 5% !

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