Appraisers are well aware of real estate cycles, the ups and downs, a buyer’s market, a seller’s market, a balanced market. We watch these trends carefully. Canada, at least in the major centers, has been in an upward ode. This has been primarily due to record low interest rates, ability to enter into the housing market with very little down, and for a time $0-down, CMHC insured mortgages, etc. A couple of times this week I have heard that the Canada’s Housing Bubble is about to burst. The first time I heard it was from a macro economist on the Lang and O’Leary Exchange. He was estimating that the market would drop approximately 25%. The second time was on the Money and Wealth Show. Danielle Park was a quest speaker and she also posted a blog on it.

I thought I should sit up, listen and do a little research of my own. After all, hasn’t the media led us to believe that:

• We did not have to bail out our banks;
• Our financial system is strong, we are global leaders - the envy of many;
• We escaped the economic crisis that our neighbours to the south experienced and are still dealing with;
• While the housing prices in many US centers dropped 50-60 percent and the foreclosure market became the norm, the home prices in our major centers dropped somewhat and then bounced back quickly and increased near or above all time highs.
• We are a safe place; there is not a housing bubble?

If the housing bubble is about to burst, how could we not be aware that Canada was in a housing bubble and if we were – How were we able to postpone it? How should we prepare? What will it mean to us locally, provincially, nationally?

There is a very good report that I recommend reading, The Elusive Canadain Housing Bubble. It is by Alexandre Pestov at the Schulich School of Business. It is long but well worth the read. To quote:

“Canadians own no favours to Steven Harper, Jim Flaherty and Mark Carney. They did not prevent the bubble from bursting; they merely postponed it. There are no miracles in how the Canadian housing bubble managed to stay afloat. However, at the end, more homeowners will suffer from the housing market correction. The ballooning national debt due to the careless sub-prime lending of CMHC and wasteful programmes designed to re-inflate the housing bubble will be shared by all Canadians. According to the CMHC financial statements, the corporation has only $8 billion equity backing $200 billion in assets. Once defaults rise, the Canadian government will have no choice, but to bail out CMHC. The scale of bailout will likely dwarf all other financial emergency responses done by the Canadian government in the history of Canada. Higher national debt, increases taxes and reduced social services will be the direct result of the Harper government’s intervention to maintain an illusion of the Canadian housing market health.”

Let’s start with we did not bail out our banks. The Conservatives, in 2008, brought in a CMHC program called Insured Mortgage Purchase Program (IMPP). CMHC could purchase, from lenders, NHA Mortgage-Backed Securities to the tune of up to $125 Billion. According to the President’s letter in the 2009 CMHC report, and I quote, “At the height of the credit crunch, Canadian lenders made full use of the program and continued to see it as a valuable option in managing their funding needs in the face of ongoing global pressures.”

What is CMHC? It stands for Canada Mortgage and Housing Corporation - a crown corporation owned by the federal government (that means you and me). Its primary function is insuring mortgages with less than 20% down payment. In default the loss is born by the government, not the financial institution. One statistic I read indicated that in the last few years nearly 90% of all mortgages are underwritten by CMHC.

Another thing the Harper government did in 2007 was to create a demand for housing by creating an influx of purchasers that didn’t previously exist. They did this by:

• increasing the amortization period to 40 years, thereby reducing monthly payments;
• decreasing the down payment to zero (you could purchase a home with nothing down).

hey created this mass of higher risk, government insured mortgages when interest rates were at an all time low. This created a demand for housing where now housing prices in our major cities far exceed increases in income and thus affordability. We turned CMHC into an insurer of subprime mortgages. The US is still suffering from the sub-prime debacle and our government quietly created one.

Affordability is further diminished with unforeseen costs. For instance the cost of fuel is increasing. The cost for me to fill up my tank the other day was $1.25 per litre and is expected to continue to rise. Not long ago it was $1.05. Increased fuel costs are magnified throughout the system. The cost of food goes up, taxes go up as the costs go up to maintain even our current privileges increase, operating expenses that go along with home ownership increases, etc. etc... Discretionary spending is then reduced which has a rippling effect throughout a community.

What seems even more impalatable to me, in consideration of the undeniable risk Mr. Flaherty’s and his government have put us in, is his concern over personal debt and the risk it imposes to Canadians. In my opinion, we have been deceived, the damage done and now we await the fallout of the ill-conceived policies.

Perhaps what should have been considered is the credit that seems to be obtainable with no qualifications and at exorbitant interest rates. Mr. Flaherty, your concern over the personal debt of Canadians is well justified. But please, own up to the hand you and the government had in it. Please consider that the banking industry is not self-regulating the interest rates and fees it charges on credit cards and by most optics is considered usury. If you are truly concerned about Canadian debt, consider not only legislating the unconscionable interest rates and fees being currently charged. It will not get us out of the mess but it will certainly help.

My rant for the week.

Our next blog will look at the interest and principal repayment over mortgage durations and the impact of increasing interest rates.