Americans, consider this your warning to look away. This probably won’t interest you, considering it’s about Canadian real estate and all. Hell, this probably won’t even interest most Canadians. Screw it, I’m writing it anyway. It’s my blog, and I’ll cry if I want to. I hear there’s a lot of porn on this here internet, so feel free to open up a new tab and go find some. My, uh, friend likes midget porn. Don’t judge me.
Anyhoo, there’s been a lot of talk about a real estate bubble in Canada, in between bites of poutine, sips of Labatt’s Blue and curling on TSN2. I’ve wrote about it, on at least one occasion. There is little doubt, at least in my mind, that certain markets have valuations that simply cannot be maintained. That’s fancy talk that means, in Toronto and Vancouver at least, houses cost way the hell too much. I blame you people, especially my American readers. For some reason.
The government of Canada does not want our housing bubble to pop anywhere nearly as badly as America’s. Our finance minister, Jim Flaherty, started taking steps to slow the market in 2008, as he ordered CMHC to stop insuring mortgages with 40 year amortizations and mortgages with zero down payments. This, combined with the global economic crisis, started doing what it was supposed to. Prices started declining, with the overheated markets leading the charge. But then, something funny happened. The trend reversed itself. Prices started going back up.
This was not ideal for the government. Soon, other entities started warning about a bubble. Every single Canadian bank of substance has issued a report warning about the impending doom. The only thing that varies is how much they think the damage will be. Bank of Canada governor Mark Carney has started issuing warning statements about the condo markets in “some parts of the country.” Certain bank CEOs have gone on record to request the government do something about housing.
It appears they’re listening.
Last week, finance minister Flaherty made one announcement and hinted at another. On the surface, these look like fairly innocent statements, but they could have far reaching impacts. Firstly, he announced CMHC would now be regulated by OSFI, rather than the minister of human resources. OSFI, for those of you who are unfamiliar with governmental acronyms, is Canada’s bank regulator. It’s the same regulator that, just a couple of months ago, issued a paper with all sorts of changes it wanted made to the mortgage market. Some proposed changes include:
- Reducing the maximum value of a line of credit from 80% to 65% of a home’s value
- Taking away interest only payments for said lines of credit
- Eliminating cash back mortgages (a way for borrowers to get around the minimum 5% down rule)
- Requiring home appraisals when you renew your mortgage
- Stricter income qualification standards
Pretty fancy bullet points, huh?
When it comes to pricking the bubble, the OSFI isn’t screwing around. Now, there’s obviously no guarantee that they’re going to implement all their proposed changes to the market, but the timing of all this screams like a warning to the market. OSFI comes out with a report with mortgage suggestions all of a month before they’re put in charge of CMHC?
I guess what I’m saying is, if you’re looking to get a HELOC, (home equity line of credit) you better start with the applyin’.
The second piece of news is something Fleherty hinted at during an interview with the National Post’s review board. Take it away Jimbo:
Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.
Wha? Is he really talking about the government getting out of the mortgage insurance business? Bitches be crazy, yo! Yeah, that’s right. I’m gangsta.
Private mortgage insurance actually exists in Canada, you just never hear about it. Genworth, the insurance arm of GE, holds about a quarter of the market, with a couple smaller players showing up and insuring a mortgage or two. CMHC dominates the mortgage default insurance business though, with their approximately 70% market share.
Can the remaining players pick up the slack if CMHC decides they’re no longer in the business? CMHC is nearing $600 billion in insured loans on their balance sheet. I’m not sure at what point you qualify to be a behemoth, but CMHC is large and in charge.
The fact that the government is going on the record with this idea should make you pause. The government is so concerned with our property market that it wants OUT OF THE BUSINESS OF INSURING IT. CMHC insurance has been around for decades, and it’s pretty much been a guaranteed money maker for the government. As long as there are less than 3% of people defaulting, CMHC makes money.
It’s been a terrific business for the Canadian taxpayer. The only reason Flaherty is hinting about getting out of the business is because the government is concerned about how large CMHC has become. Would you hint about getting out of a business you thought was terrific?
Anyway, if you’ve made it this far, just remember a couple things. Canada’s housing market is too expensive. If you live in Toronto or Vancouver, get out while you still have time. And, the government is clearly attempting to intervene in the mortgage market. Should the government do that, or should they let this play out?
Bubble? No way – this time is different! It’s always different.
But seriously, your price to rents are wack. The Economist says you have the highest price to rent ratio in the world. Given that a home purchase is a simple choice between buying and renting, renting is obviously a much better choice at the moment. Anyone who is purchasing a home is essentially telling the market they believe home prices will continue to rise or rental prices will continue an upward trajectory. Sounds like the US in 2006-2007.
The government already intervened by supporting the market with insurance. If people choose to use government insurance, then clearly the government is the least expensive and most available insurer, meaning that it’s under-pricing risk relative to what private insurers want for any given amount of risk.
Some stat I saw somewhere said Canadians have something like 70% equity in their home on average. That’s an average figure – not the median – but it looks like there’s room for the CHMC to up the ante to require LTV of less than 65%.
So, does this mean you’re going to sell your rental properties and bet on a falling real estate market? It looks to me from the data in the Economist piece that you’d do much better south of the border.
Why don’t we have the same regulations? Typically, mortgages are less than 45% of the total family gross income. And this is the industry on the hot seat now. Almost similar to the US somewhere in 2006-2007(gladly the government intervened now). The credit cards, personal loans and other windows for credits give to as much as 150% for debt.
(*sighs) I guess the issue is in human nature. We tend to ask for more without paying attention on what is enough.
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