With house prices rising, and incomes not, with bidding wars in many centres and real estate values at a record level, one question looms: Whereâ€™s the money coming from? How are buyers, especially newbies, pulling this off?
Well, chew on this: Two years ago when RBC did its annual survey of homebuying intentions it asked first-time buyers how much of a down payment they planned on making. Twenty-one per cent said their down would be â€œbetween $1 and $5,000.â€
That was in 2007. Since then thereâ€™s every indication things have gotten worse. In fact, for people taking out mortgages today itâ€™s estimated the average amount of equity they have is just 6%. The leaves 94% of the house value as debt. And while reliable statistics on this are hard to find, my banker buddies tell me that virtually every new loan they write these days is for 5% down, with a 35-year mortgage. After all, if youâ€™re buying in Vancouver. Calgary or Toronto, thatâ€™s the only way banks can swing the deal.
So this answers the question of where the money to fuel this housing bubble originates. Bankers. And why would banks take the major gamble of loaning, say, $380,000 to people who are buying a $400,000 house and only have $20,000? If markets fall 10%, or even 5%, that homeowning coupleâ€™s equity is entirely wiped out. In fact, the value of the home could easily drop beneath the value of the loan, which would constitute an absolute loss for the bank.
And hereâ€™s another good question: If I want to buy that $400,000 house and have $200,000 for a downpayment, why am I paying the same mortgage interest rate as the first-timers who barely have pizza money? Donâ€™t they constitute a larger risk? Whereâ€™s the risk premium on the money loaned to them? Why is this system so screwed up that ultra high-risk borrowers have money showered upon them by our famously conservative and prudent banks?
The answerâ€™s simple: the banks donâ€™t take any risk. Itâ€™s all on the taxpayers, thanks to CMHC.
And these days, Canada Mortgage and Housing Corporation is turning into a financial behemoth, as Ottawa uses it to fuel a housing boom thatâ€™s clearly turned into an asset bubble. Last year alone, CHMCÂ did 919,780 deals worth a staggering $148 billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to $600 billion, or about double what it was two years ago.
Hereâ€™s how CMHC and the federal government are inflating the real estate bubble:
- CMHC provides insurance to the lender (the bank) for the entire amount of any mortgage it makes when the purchaser has less than 20% to put down. These days, thatâ€™s virtually every new deal.
- If the homeowner defaults, the bank gets 100% of its money. The taxpayerâ€™s on the hook for the loss.
- This insurance means the banks face no risk lending money to people with little or no credit rating and virtually no equity, so they charge no rate premium.
- Buyers are then able to access money at the same current cheap rates as the bankâ€™s wealthiest and most credit-worthy customers, allowing them to bid up house prices.
- There is no penalty anywhere in the system, except for CMHC insurance payments, for having close to a zero downpayment.
- Banks will allow borrowers to simply add that insurance payment to their mortgage principles, so many buyers are not even aware of it.
- And through CMHC, Ottawa has bought up tens of billions in existing high-risk mortgages from the banks, even though there was no default, which opened up their balance sheets and allowed them to make even more high-ratio loans.
CMHC is now larger than at least one of the Big Six banks and is, comparatively speaking, unregulated.
A nation of debtors. Guaranteed.