A flurry in articles over the weekend and the breadth and depth of our nation's looming real estate crisis may be starting to gain attention.
Diane Francis, Editor-at-Large for the National Post, published this piece on the weekend.
- "In March, CMHC was allowed to insure up to C$600 billion in mortgages, up from C$450 billion the year before, said a CMHC spokesman today... This is a looming problem which flies in the face of Ottawa’s smugness about its superior regulatory regime and Canadian banking conservatism. For starters, CMHC is as big as a bank and not regulated. It's a mortgage slush fund which distorts the market. It allows banks to lend recklessly without consequences... It rewards those willing to speculate with leverage and discriminates against those who are prudent."
In the same article, Accountant Derek Bruce worries that the Tories are allowing CMHC to become like Freddie and Fannie south of the border.
- “Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments thus insuring end-investors these papers are insured from loss.”
Meanwhile the Globe and Mail has been raising it's own alarm about CMHC.
- "CMHC insurance helps to keep borrowing costs down for people with small down payments who would otherwise face higher interest rates from banks. That enables would-be buyers to bid more for houses, knowing that they won't be penalized for having a small down payment, and adds fuel to the housing market's soaring prices. CMHC's securitization programs, through which it effectively buys swaths of mortgages from lenders, free up space on banks' balance sheets, allowing them to give out more mortgages than they otherwise could."
As these stories were hitting the newsstands, Bank of Canada Governor Mark Carney issued a reality check that we have been trumpeting all year.
Speaking to CTV's Question Period on Sunday, Carney was asked if Canadians should lock in to five-year mortgage terms.
- "It's not my job to give investment advice to Canadians," Carney said. "But on the general point anybody, anytime they borrow for a longer period of time, wants to think about, 'Can I sustain that borrowing over the course of that time? What happens when interest rates ultimately normalize?'"
The key word there, of course, is 'normalize'. The average five-year mortgage rate over the past two decades is 8.2%.
But that fact is lost on thousands of people who, as the Globe and Mail noted, are taking advantage of low. low interest rates and the ability to only make the minimum down payment of 5% to 'bid more for houses' than they could otherwise afford.
Many are buying (and borrowing) the maximum that a VRM at 2.25% will allow them to purchase.
This is why the press has spend the weekend reporting the clear warning that Carney has been issuing against taking on too much debt. Today's low interest rates will not last forever.
"People should manage their affairs prudently in anticipation that, at some point, rates will return to a more normal level. Obviously, rates are exceptionally low."
Somehow the Governor's warnings ring hollow as CMHC hits the $600 Billion mark. It's like the farmer who closes the barn door after the horse has already run away.
His actions, at that point in time, are useless.
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