CMHC - Liberals Recent Changes to the Rules

The challenge of bubbles forming in the Real Estate market is very difficult to regulate. CMHC and other countries’ equivalents have errored in that they have elevated both confidence of lenders and the availability of credit, thereby, to some degree distorting the market. There is no question that insuring mortgages reduces risk to lenders and by extension credit becomes both more widely accessible and more readily available. There is no question that Credit makes real estate more accessible, increases demand and elevates price.  It is more the case that government can exacerbate cycles in the real estate market, than it will ever be able to control cycles, or in any real way regulate markets away from cyclicality; save perhaps in the use of the draconian measures that were forwarded in the 1970’s by the then Liberal government in the form of wage and price controls – a disastrous policy foray that should be avoided with extreme prejudice.

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One wonders what affect the recent bid by the new government at cooling the housing market will really have. One understands, that while it will be sometime before there is upward pressure on interest rates, that interest rates will rise and inherent in that reality is a “national” risk of widespread over extension  amongst the population holding large mortgages. How is this policy going to help. This will have little or no effect on the overall challenge; policy only makes sense when policy is effective. The government would be much better off issuing a payment matrix at the time of mortgage issue that shows the payment at today’s rates and the payments at 2 point intervals to 18%, the highest number I remember from the dirty 80s. This policy is false comfort at best.

What values are being exalted at the chosen price point; it is okay to have a $500,000 home, but $650,000 home is different – how?

CMHC as an agent to help young people get their foot in the housing market is a good thing, CMHC should be aggressive as it can be in helping New Entrants to the market. CMHC has a limited role to play in some other areas of the market as well – but in the main, lending intuitions need to be exposed to the risk of their choices. We saw the disasters that emerged from other realties in last big downturn, when people become isolated from responsibility they become irresponsible.   

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CMHC – Help New Entrants GOOD - Finance Speculation - STUPID

The CMHC’s present role, at its base, is to insure mortgages, as such, it is an excellent addition to the real estate lending complex. The concept of the government underwriting a mortgage to assist Canadians to purchase “a” home is an outstanding one. Many Canadians have the good fortune when they decide to purchase a home to simply pay outright, call on parents to cover the cost or to provide the down payment or in some way facilitate access to owning a home.

There are many Canadians, deserving Canadians, that toil in a marginal state – unable to buy a home because their monthly commitments preclude saving a down payment of 25% ( the typical amount for uninsured mortgages) – this is known as the “renter’s trap”. The CMHC’s ability to underwrite mortgages so that people can enter the housing market with only a 5% down payment is much needed in many cases.

If one believes property rights are the keystone of a market-based economy, as I do, then one must also believe that there is a right to accumulate property. If you’re interested in promoting capitalism, there needs to be access to capital or a means to extract capital from the deployment of self in the marketplace. The purchase of a home and its eventual complete ownership offer a mechanism for people to capitalize their efforts, and then to redeploy that capital beyond shelter to other ventures in society at large.

The difference in living standard between Canada and the western world, and the emerging second and third worlds is attributable, firstly, to simple and clearly defined property rights, and secondly, to the ability for the masses to access property and related capital benefits. In Canada the fruits of the beneficial effects of home ownership are prominent, aside from the direct benefit of industry activity, there is the secondary benefit of people being able to actuate more effectively in the market due to capital retention and accumulation.

What the CMHC should avoid doing is financing speculation. The residential housing market is a temptress for a government; its ability to generate “growth” or to stimulate the economy and its most immediate attachment to national industry tends to move government beyond the mere provider of housing opportunity for the unsupported housing entrant, to an institution seeking “spin-off” with blind abandon. The government then needs to be, the sober player in the market, as opposed to the accelerant. The government should the remain in the business of supporting the purchase of a single home, it should avoid underwriting mortgages on second, third … investment properties. The shoe box condo market looks pretty good when you can lever it up from 5%, the challenge is that when the market takes an upward thrust the ability to leaver brings people into the market at a high velocity and bubbles not only form and burst, but they form big.  

At the core of most financial downturns or economic calamities, one often finds a real estate bubble to blame. The “mob mentality” to "get in now while it is going up" generates a circumstance where there are carpenters building houses for carpenters – the quintessential building boom. The key determinants in the residential real estate market, employment and credit cost and availability, need to inform the market on as tight of a feedback loop as possible, the largest disasters – the last financial crisis in large part – are often a product of government involvement in the housing market. Fanny May and Freddy Mac in the United States, in many ways, underwrote the most irresponsible lending binge in history; we need to be wiser in Canada.