Canada’s Housing Bubble

I was reading the Financial Post the other day and came across an interesting article on Canada’s housing bubble and how CMHC has contributed to our situation. Diane Francis brought up quite a few valid points. As a mortgage broker I see the benefits every day of CMHC insurance and how it allows homebuyers to purchase their home with as little as 5% down. However, the by-product of making housing more available to more people is it drives up home prices. If you ever took economics 101 in school you will know that increasing the demand for an item while keeping supply constant will result in increased prices.

When you add our historically low interest rates to the mix…….well it could be a recipe for disaster. After all what contributed to the economic melt down in the US? You guessed it…..the availability of financing to people that probably should not have had it. In fairness CMHC does impose criteria far more strict than the US, but the basic principal is the same.

Diane also brings up a good point concerning interest rates which I have actually wondered about myself. Why do banks charge a homebuyer with only 5% down the same interest rate as someone who is putting 25% down? The answer is CMHC.  Since the 5% down mortgage is insured there really is no greater risk to the bank lending to someone who doesn’t have much skin in the game. This gets to the heart of Ms. Francis’ point. CMHC creates an artificial real estate environment. Consumers can use high amounts of leverage to buy homes and banks can lend money with very little risk. In the “real world” the greater the risk the higher the interest that is charged.

I will end this post by saying I am a big believer in mortgage insurance and CMHC. They allow many first time homebuyers to purchase a property without waiting 10 years to save up a downpayment. However, she does bring up quite a few valid points. If you are interested in reading the full article CLICK HERE

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2 Comments for this entry

• 

  David Pylyp

  November 7th, 2009 on 9:59 am

  I absolutely agree with you about Mortgage Insurance and CMHC.
  Newspaper people are in the business of creating print fodder for readers to consumer that advertisers can frame.

  The foolish notion that CMHC is artificially crafting or prompting the market forward is poor business thinking. We may as well compare ourselves to countries without banking systems in place and copmpare the 30 to 50 % downpayments required on any purchase. First time buyers are a welcome component of the housing market but they are not the entire market.

  Maybe we could all live in social assisted housing until we save the downpayment.

  Maybe we could live in co operatives?

  Absolute silliness. No worthy of the attention she received.

  David Pylyp
  Living in Toronto
• 

  admin

  November 7th, 2009 on 11:50 am

  Great point David. Thanks for the comment!