Using a bunch of local firefighters as props behind him, F stood outside a firehall near Ottawa and tried to quell the global angst this pathetic blog had created. “I would like to see the (housing) market correct itself,” the elfin deity said. Regarding calls by the banks to murder the 30-year mortgage, and by academics to dump the 5% down payment, the finance minister said this was ‘a bit much,’ since banks are the ones who determine risk.
“We have bank executives in Canada saying ’You know, really the rules on insured mortgages should be tightened up’. They must forget that they are actually the ones that issue the mortgages — it’s their market, it’s not my market.”
Ah, if only that were true.
By every measure, Canada’s exceeded the orgiastic housing excess that preceded the American real estate implosion, including the government’s key role in making shelter unaffordable for the average family.
A greater proportion of our economy’s now dependent on building, selling and financing real estate than was ever the case in the US…
And look at this. The amount of exposure Canadians have to houses has exploded…
…at the same time they actually have less equity than they did a decade ago.
This is what a bubble does. It drives prices up. It makes everyone horny for a house. People get into ridiculous bidding wars, pay too much and take on piles of debt. In fact, debt rises faster than equity when most people are using extreme leverage – which is now the norm. Thanks to the federal government. And as equity declines relative to valuations, homeowners become far more exposed to personal disaster if prices take a dive in a real estate correction.
This is where we are today. And undeniably, F made it so. Not only for the idiocy of bringing in 0%-down, 40-year amortizations just as the American housing market was crashing, or goosing housing by doubling the amount virgins can suck out of an RSP for a down payment, or creating a new tax credit to help pay closing costs, but mostly for birthing the greatest moral hazard in Canadian financial history, via CMHC.
When the GFC struck, you might recall that F moved quickly to have Ottawa buy $75 billion in toxic, high-ratio, virginal mortgages from the banks, transferring that swill from their balance sheets to yours. Shortly thereafter, F allowed CMHC to double its ceiling for insuring mortgages, to a stunning $600 billion (equal to the national debt). That money’s largely gone.
What did these moves mean?
Simply that the risk for making dumbass mortgages – loaning money to people who didn’t have any, so they could buy houses at the most inflated prices ever – would no longer rest with those who profit from doing so. Yes, the banks. This, as Dan Simon of Euro Pacific Canada rightly states, defines moral hazard. When “those who are creating risks to earn profits are not the ones who bear the consequences for those risks.”
In allowing this to happen, F is moving us down precisely the same path that creamed America. Only faster. The collapse of Fannie and Freddie cost Washington $1 trillion, gutted the middle class and eviscerated the economy. Yet those quasi-government agencies guaranteed only 25% of US mortgages. CMHC guarantees 90% of ours. Fannie disintegrated because it had barely a dollar to cover every $50 in mortgage guarantees. CMHC has only a buck to cover twice that – $100.
“If the Canadian housing market ever took a dive,” says Simon, “the CMHC would be bankrupt in the blink of an eye.” And how many tens, or hundreds of billions, would it cost the nation to prevent a full-on real estate meltdown?
Like it or not, the little pecker’s intimately thrust into the housing market. It was robust but balanced when he started stimulating it in 2007, and today’s evolved into an unstable, wobbly, speculative, emotional, unsustainable and unaffordable danger. He, not the banks, created the moral hazard. Now he has a moral responsibility to act.
Shall we bet?