Something to Think About

From Murray Dobbin at The Tyee (via The Gazetteer): "Why Canada's Housing Bubble Will Burst"

From reading it this morning (tis now 9:55 pm) I recall the gist of it as being that much of the action in Canada's current real-estate market is the result of a demand boom fuelled by the Canada Mortgage and Housing Corporation lowering the standards for acquiring mortgage debt. Let's see if I'm right:

What do the mid-recession housing boom and the Harper Conservatives' rise in the polls have in common? Answer: the Canada Mortgage and Housing Corporation's massive sub-prime mortgage scheme that is keeping up the appearance of an economic recovery. ... But what few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world. ... 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. ... The banks themselves have taken on virtually no new risk. According to CMHC numbers in the two years from the beginning of 2007 to January 2009, Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent. Fully 90.5 per cent of all growth in total Canadian mortgage credit outstanding since 2007 has been accounted for by Mortgage Backed Securities. Of course, the banks have no interest in saying no if you have qualified for a securitized CMHC loan -- because they bear no risk if you default."

There's some genuine debate as to the soundness of Dobbins' claims in the comments section there. But it seems that the long and the short of it is that our housing market has been artificially inflated. And I don't see that the way to make housing affordable for people with insecure, stagnant or declining incomes is to have inflated housing prices paid for by easy credit from the government.

Sure, it's good to keep the economy humming along, but this seems to be a cure for a symptom, not for the disease, which is overextended,underpaid consumer/workers. As the layoffs pile-up and the unemployment insurance runs out, the CMHC will be on the hook for hundreds of billions and if real-estate prices evaporate there won't be any easy way to cover those mortgages except through printing money.

I'm not an economist, but this story seems to be that whereas the USA had a bankster-driven housing bubble, Canada has a government guaranteed housing bubble.