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. Reading the newspapers these days, you have to wonder whether Canada was on another planet when the global credit crisis hit. House prices have actually increased in some provinces and now there is a shortage of houses for sale in southern Ontario. Credit is flowing everywhere.And while the Harper government basked in the glow of their cunningness, a storm was brewing. Canadians were given a false sense of security, spending lavishly, which helped the economy in the short term, but borrowing heavily to do so.
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. What's almost as alarming as this reckless policy is that no one in the financial media is talking about it, even though everyone knows the facts.
As a result Canadian households have one of the highest debt to income ratios in the world.
And the largest chunk of that debt is in housing. Many who couldn't afford to own a home, or would under normal circumstances fail to qualify for a mortgage, were now entering the market, while others bought houses well above their means. And houses became more expensive as a result of more competition in the market.
... let’s say you have the average Canadian family making the average income – about $70,000. You dwell in the average house, have average kids (1.2 of them), and pay average taxes. That means you have $54,000 left to live on for a year. Sadly, your house eats 48.9% of your pre-tax income, which equals $34,320 – which also means you have about $19,600 left. That’s $1,600 a month for food, clothes, car, vacations, school fees, insurance and your online connection to this pathetic site. Notice I did not include ‘savings and investments’ because, of course, there’s no money left.And of course the scandal is not just "dumbass public policy" but a media that failed to warn Canadians of this danger. Instead they allow the Harper government to thump their chests and sing hallelujah over their handling of the economy.
And you think this is bad? Try living in a high-cost city like Toronto or Vancouver, where a house eats more than 50% and 65% of pre-tax family income respectively. This is what happens when real estate speculation meets dumbass public policy, driving the cost of shelter absurdly higher. It’s a massive hidden tax on the middle class, sucking off billions which should be finding its way into a better life or a nest egg for the future. Instead, real estate now means sacrifice and debt. And danger.
The Globe did run an in depth early on, when Flaherty allowed AIG to infiltrate our financial sector. The same AIG that helped to destroy the American economy.
And Chris Gallant from Forbes magazine also covered our rosy economic myth:
For all the recent bravado claiming that Canada's supposedly boring yet prudent financial regulations have steered it permanently clear of housing bubble territory, the simple truth is that key causes of the U.S. housing bubble have been sufficiently replicated in Canada.And we are now about to wear this fiasco as indeed the housing bubble appears ready to burst.
CMHC: Fannie and Freddie's Canadian Cousin - For example, while it is technically true that Canada does not have its own publicly-traded GSEs such as Fannie Mae .. and Freddie Mac .. to artificially inflate its housing market, it has the next best thing. The Canadian Mortgage and Housing Corporation (CMHC) is Canada's national housing agency used to provide mortgage insurance, which is fully integrated by the federal government ....
(Uh) Oh, Canada! - Since 2007, when the first effects of the credit crunch began to be felt, the Canadian government postponed the housing bubble's burst by dramatically loosening lending standards, allowing CMHC to insure mortgages with 40-year amortizations and 0% down-payments for the first time in history. This of course flooded the market with new, high-risk borrowers, propping up already historically high prices with unsustainable, artificial demand.
From 2007 to early 2009, the total dollar value of CMHC's outstanding MBSs grew from $138 billion to $265 billion, an increase of 92%. During this same time, the total mortgage credit outstanding on the collective books of Canadian banks increased by only 1% to $447 billion. In other words, all the market demand that has been propping up Canadian house prices can be attributed to Canada's version of subprime loans that the free market was not willing to bear the risk of.
Even RBC now says there are “red flags” over the Vancouver market. “While the Vancouver market is clearly vulnerable to a price correction, this does not imply that a collapse is imminent because supply (both in the existing and new home sides of the market) is well contained at this point.” What does that mean? If listings rise, of course, it means there will be “a collapse.”And with our high rate of both unemployment and underemployment, we could see a lot of houses come on the market.
In the GTA: “The deteriorating trend in Toronto’s housing affordability continued.” And the bank cautions that a “wild downswing” in prices was kept at bay only because vendors retreated. Which begs the question of how long that will last. As I’ve told you before, I expect this correction to be followed by a multi-year melt, as interest rates normalize and then those oxygen-sucking, walker-wheeling Boomers start trading houses for income.
And what is our exalted one doing about this? Nothing. Instead he and his Mike Harris sidekick Flaherty, are continuing with the facade of having a steady hand on the economy, while instilling fear of a coalition. Same old, same old.