Since we are returning, we thought we'd throw up a few posts reviewing how we got to where we are with our Canadian Housing Bubble.
With all the intense press attention on our housing bubble over the last year or so, China has become the scapegoat for all our housing woes. And while the world is awash in Chinese money today, it's important to acknowledge the home grown roots of our problem.
And to understand that... it's crucial to recall how the CMHC was specifically instructed by the Harper Conservatives to create our housing bubble.
"Say what?", you exclaim!
It's true. What is even more astonishing is that the United States also deliberately created their housing bubble too.
Both nation's predicaments were deliberately crafted.
After the dot com crash of 1999 and the 2001 terrorist attacks, America had a choice of entering a painful recession (which critics say was desperately needed to correct the imbalance of excessive monetary stimulus in the 1990s) or politicians could kick the can down the road and artificially inflate the economy.
The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again.
This was a prewar-style recession, a morning after brought on by irrational exuberance.
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
The creation of a housing bubble was a deliberate economic stimulus move.
And Canada followed America's lead on this.
In America, from 2002-2008, President George W. Bush almost singlehandedly, through cheap rates, lax regulation, government housing subsidies, presidential boosterism and financial engineering, managed to get the home ownership rate to 70%.
Following the lead of Republicans in the US, the Canadian Government saw the success of this plan and began pumping the Ownership Society as well. Gifts, incentives and inducements were showered on home buyers and the result was demand swelled, prices popped and a bubble was born.
- Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years. CMHC also had limits on how much you could buy with their insurance.
- Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.
- By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased.
- In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured).
- In March 2006 you had 0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year. Interest only payments were allowed for 10 years.
- In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years.
- Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them. You could basically get paid if you bought a house.
- Not only were the rules surrounding the granting of money loosened, but CMHC's cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion by 2014.
But wait... there's more!
The most astonishing element, in addition to of all this, was something that has been effectively buried. Something that, now that the mainstream Canadian media have finally turned their attention to the chaos being created by all this malinvestment in Real Estate, are completely unaware of.
- In an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. CMHC described these risky loans as "high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities." The approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, average equity as a share of home value was down to six per cent -- from 48 per cent in 2003. At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1 -- almost 50 per cent higher.
Shortly after the article was written, this blog contacted Dobbin and asked him about the source for this comment.
Dobbin's statement was confirmed, CMHC stated in that document that they had been directed by the government to approve as many high-risk borrowers as possible.
When the American housing bubble popped in 2008, the Conservatives bet heavily they could shield our boom from the 2008 financial crisis. What they did to add fuel to a powder keg which has now grown insanely large as other Central Banks (US Fed and Peoples Bank of China) have flooded the world with Quantitative Easing and excess credit.
But make no mistake. The foundation of this massive bubble started at home - with the manipulation of CMHC policies.
(Below are the screen shots of the original Wiki site on CMHC before it was sanitized)
Click 'comments' below to contribute to this post.