Better know a talking point

By Aaron Wherry - Thursday, February 28, 2013 at 10:21 AM - 0 Comments

The Conservative issued a bulletin on Wednesday morning to warn that Bill C-400, an NDP MP’s bill calling for a national housing strategy, would cost a minimum of $5.5 billion per year.

C-400, as a private member’s bill, can’t include “financial provisions” unless the government consents. According to the summary of the bill, its purpose is ”to require the Minister responsible for the Canada Mortgage and Housing Corporation to consult with the provincial ministers of the Crown responsible for municipal affairs and housing and with representatives of municipalities, Aboriginal communities, non-profit and private sector housing providers and civil society organizations in order to establish a national housing strategy.” (With the Conservatives voting against, the bill was defeated Wednesday evening.)

So how does the Conservative party conclude that the cost is $5.5 billion per year? The party’s release cites “Human Resources and Skills Development Canada.” I enquired with the office of Human Resources Minister Diane Finley. Ms. Finley’s office directed me to the Canadian Mortgage and Housing Corporation. CMHC did, in fact, publish a “backgrounder” on C-400. That backgrounder states “the proposed bill C-400 would cost Canadians over $5.5 billion per year in rental subsidies alone.” The backgrounder goes on for another 684 words, none of which explain that estimate.

So I asked the CMHC: How had this estimate been calculated? To what in the bill did it refer? And how often did the CMHC provide analysis of legislation and private members’ bills?

Wednesday night, the CMHC sent along the following. Continue…

Tories at it again? Partisan criticism of NDP housing bill found on Crown corporation website

By The Canadian Press - Wednesday, February 27, 2013 at 4:46 PM - 0 Comments

OTTAWA – A Crown corporation’s decision to comment on an NDP-backed bill is raising questions about whether the Conservative government is using the public service for partisan aims — again.

The Canadian Mortgage and Housing Corp. claims on its website that the New Democrats’ proposal for a national housing strategy will cost $5.5 billion in rental subsidies.

That’s the same figure being used by Tory MPs and the Conservative party in their attacks on the bill.

The CMHC didn’t immediately return a call seeking comment on why they posted the material or the source of their information.

Housing advocates point out the private members’ bill doesn’t call for government spending until all parties sit down to produce a plan.

Late last year, two highly partisan letters by International Co-operation Minister Julian Fantino appeared on his ministry’s website before being removed once deemed inappropriate.

Housing starts drop like a stone in January

By Erica Alini - Friday, February 8, 2013 at 11:19 AM - 0 Comments

To recap:

• Housing stars came in at a seasonally adjusted annual rate of 160,577 units in January. That was a 18.5 per cent decline from the previous month and well below the consensus expectation of 195,000 new homes.
• The drop was centred in urban areas, whereas rural starts rose 15.6 per cent.
• Within urban dwellings, the decline was steepest in the condo market, where the rate of construction of new units dropped nearly 29 per cent. Single-family homes were down 11.2 per cent.
• The slowdown was concentrated in Ontario, where the seasonally adjusted annual rate of new home construction plunged nearly 44 per cent. Quebec also registered considerable weakness, with starts down over 29 per cent.

What the analysts are saying:

• January numbers continue a downward trend that’s been evident since August 2012, wrote RBC’s Laura Cooper.
• The drop is hardly surprising, according to TD’s Diana Petramala. The pace of home building is now more in line with the rate of household formation.
• The residential construction sector, which was an engine of economic growth in 2012, will likely be a drag in 2013, predicted CIBC’s Emanuella Enenajor.

Canada’s housing market: is it a cooling? Is it a crash?

By Erica Alini - Wednesday, October 31, 2012 at 9:00 AM - 0 Comments

Last Friday, rating agency Moody’s announced that almost all of Canada’s biggest banks might be in for a credit downgrade, citing “concerns about high consumer debt levels and elevated housing prices.” It was just the latest warning that, after soaring for 14 years, Canada’s housing market might be finally headed back to Earth.

Now, virtually everyone—from the Bank of Canada and the Finance Department through Canada’s banks to the International Monetary Fund and independent analysts—agrees that housing is losing steam and Canadian wallets are overstretched.

But is Canada’s housing market headed for a gracious landing or a face-forward crash? When it comes to predicting how rough a ride it will be, opinions vary widely.

To help Maclean’s readers make up their minds, we’ve compiled a review of prominent arguments supporting bullish and bearish positions on four key questions about the future of Canada’s real estate and what it all means:

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Flaherty wants to privatize the CMHC

By Erica Alini - Monday, October 22, 2012 at 10:02 AM - 0 Comments

The Globe and Mail is reporting that Ottawa would like to privatize the Canada Mortgage and Housing Corp. in the next five to 10 years, based on remarks made by Finance Minister Jim Flaherty in an interview. Here’s the initial reaction from the Twitterverse:

Canadian housing: There’s an obvious oversupply problem in Vancouver, Toronto and Montreal

By Ben Rabidoux - Tuesday, September 11, 2012 at 1:39 PM - 0 Comments

Getty Images

August resale and housing starts figures are now out for all three of Canada’s biggest cities, and it’s not a pretty picture.

Vancouver

When the August resale data for Vancouver came out last week, the headline news was that sales had fallen to their second lowest level for the month since 1998. Sales were 30 per cent below what they were in August of last year and 40 per cent lower than the August average of the past 10 years.

But the numbers are even worse than the headline reveals. On paper, August 2008 holds the record as the weakest month of the past 15 years. However, it had two fewer week days than August 2012. If calendar differences are taken into account, last month represents the lowest sales volume of any August in 15 years.

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The REAL Canadian bank bailout

By Ben Rabidoux - Thursday, May 24, 2012 at 1:21 PM - 0 Comments

Woodleywonderworks/Flickr

Ben Rabidoux is is an analyst at M Hanson Advisors, a market research firm, where he focuses on Canadian mortgage and credit trends and their implications for the broader economy.

The Canadian Centre for Policy Alternatives made quite a stir a few weeks ago when they released a report detailing a “secret” Canadian bank bailout. The report focused on three programs the government used to support Canadian banks during the financial crisis–primarily the $69 billion Insured Mortgage Purchase Program initiated by Ottawa as a means to ensure that banks would be able to keep funding consumer mortgages. The report labeled the IMPP a “bailout,”but banks were quick to point out that this program presented a zero net increase in taxpayer liabilities as these mortgages were already insured by Canada Mortgage and Housing Corporation.

However, the 2011 CMHC annual report reveals clear evidence that taxpayers did in fact take on significant risk in propping up the mortgage market during the financial crisis and Ottawa owes Canadians some answers on exactly why this was allowed to happen.

First, though, some background. In Canada, bank-originated mortgages with less than a 20 per cent down payment must carry mortgage insurance, which is typically paid for by the borrower. CMHC is the primary provider of such insurance in Canada. However, banks also have the ability to purchase insurance on pools of low-ratio mortgages (i.e. where the borrowers have made a down payment of more than 20 per cent of the value of the house) if they choose. This is commonly known as “bulk portfolio insurance.”

As the table below shows, CMHC bulk portfolio insurance for low ratio mortgages ballooned in 2008 and 2009, at the height of the financial crisis, and then again in late 2011. CMHC recently announced that it is going to start heavily rationing bulk portfolio insurance as it rapidly approached its $600 billion parliamentary-approved mortgage insurance cap–which Ottawa, as I have written before, isn’t likely to raise as CMHC insurance represents a direct liability of the Canadian government (i.e. taxpayers) and stood at only $250 billion in 2003.

2011 CMHC Annual Report, p. 92

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‘Clear evidence of a bubble is lacking’—really?

By Erica Alini - Thursday, May 10, 2012 at 1:48 PM - 0 Comments

eric dickman/flickr

Earlier this week the Canadian Housing and Mortgage Corporation published its 2011 Annual Report–which reads like a 184-pages long effort to brush off concerns about Canada’s housing market. “Clear evidence of a bubble is lacking,” the document proclaims at one point, after liberally sprinkling the words “solid,” “sound,” “responsible” and “prudent” throughout the previous 30-some pages.

Well, signs of a bubble are rarely “clear.” As Finn Poschmann, of the C.D. Howe Institute, told Bloomberg on Tuesday, it’s always difficult to tell whether a bubble has formed until it goes “pop.” This is partly why bubbles, especially in real estate, continue to happen even though you’d think someone at some point would have learned the lesson.

But let’s take a closer look at the CMHC’s no-bubble-no-worry argument. The housing agency seems to argue that the housing boom of the last decade was largely warranted by the fundamentals, i.e. important and independent underlying demographic and economic factors. Specifically, among other things, the CMHC notes that:

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The under-the-radar changes that may soon deflate (or pop) the housing bubble

By Ben Rabidoux - Monday, April 23, 2012 at 11:46 AM - 0 Comments

Ben Rabidoux is is an analyst at M Hanson Advisors, a market research firm, where he focuses on Canadian mortgage and credit trends and their implications for the broader economy. He blogs regularly about the housing market at The Economic Analyst.

The next decade for real estate in Canada will be fundamentally different than the last. Our aging population, a mismatch between where our prices are and where they should be based on our economic performance, and rising interest rates are all reasons for this. However, the greatest difference will be in the availability of credit going forward, and those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible credit over the past ten years or so have completely missed the boat.

Despite three rounds of mortgage rule changes since 2008 that largely corrected previous mistakes, we’ve seen a decade of extraordinarily loose lending in Canada. But the era of cheap credit may soon end–and possibly quite abruptly. News has come from Canada Mortgage and Housing Corporation  and the Office of the Superintendent of Financial Institutions Canada, Canada’s chief financial regulator, that major changes are on the way, and it’s hard to understate how significant they may prove to be.

Here’s what those changes look like, in a nutshell:

1)  CMHC will drastically draw down on mortgage insurance.

CMHC insures nearly 50 per cent of the whopping $1.1 trillion in residential mortgage credit currently outstanding in Canada. The growth in CMHC insurance has been shocking (more on that here)–just look at these charts:

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Reining in the mortgage king

By Jason Kirby - Monday, July 11, 2011 at 9:15 AM - 2 Comments

In March, Maclean’s warned that the Canada Mortgage and Housing Corporation, the quasi-governmental insurer that underwrites $500 billion of residential mortgages, answers to no one—not Canada’s top financial regulator or even the minister of finance. That all quietly changed last month when Ottawa passed a law that puts the CMHC strictly under the watchful gaze of both the finance minister and the Office of the Superintendent of Financial Institutions (OSFI).

With the new law, CMHC must hand over “prescribed books, records and information” and make those records available to the public. The legislation also allows the minister to set capital requirements and impose fees to compensate the government for the risks it assumes by backstopping mortgages.

CMHC has always said the money it sets aside to cover insurance losses exceeds that required by OSFI. But Finn Poschmann, a C.D. Howe researcher, told the House of Commons finance committee the new law is overdue. “There are a number of informal arrangements through which our oversight agencies are able to have a look at what it is that the CMHC does and the risks to which taxpayers are exposed,” he said. “However, it is an informal arrangement. It’s good to have this in legislation.”

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The CMHC: Canada's mortgage monster

By Chris Sorensen And Jason Kirby - Wednesday, March 23, 2011 at 12:51 PM - 62 Comments

David LePoidevin isn’t the first person to suggest Canada’s roaring housing market is headed for a U.S.-style crash. But he is a rare breed of money manager for daring to point a finger at the Canada Mortgage and Housing Corporation, the country’s biggest mortgage insurer. In a fall 2009 note to his clients, LePoidevin questioned what was underpinning the country’s skyrocketing home prices, aside from rock-bottom interest rates. “The stock market was sure not providing huge capital gains to the masses,” he wrote. “Did the banks all of a sudden open up the lending spigots? In fact banks have actually reduced the number of their mortgages held from the peak of third quarter of 2008. The smoking gun is the CMHC and its securitization policies.”

As mainstream economic commentary in Canada goes, it was damning stuff. And it provided ammunition to critics who argue the Crown corporation’s policies have inflated a housing bubble. The CMHC is arguably the most influential player in Canada’s $1-trillion housing market. Its main function is to provide mortgage insurance for prospective homeowners who put less than 20 per cent down on their houses, protecting the banks in the event of defaults. The CMHC also helps to spread risk by finding investors to buy CMHC-insured mortgages that have been pooled together into so-called mortgage-backed securities. All of this is guaranteed by the government.

Almost immediately, LePoidevin’s bosses at National Bank leapt to the CMHC’s defence. In a letter to an Ottawa newspaper that had referred to the commentary, co-chief executive Ricardo Pascoe said the Vancouver portfolio manager’s views were “personal” and “do not reflect the views of National Bank Financial Group.” When reached by Maclean’s, LePoidevin declined to talk about the public rebuke or the CMHC in general. A National Bank spokesperson justified its actions, saying the company “felt that the commentary was treading on social and political issues.”

The apparent unwillingness of the country’s sixth-largest bank to challenge the CMHC is curious given the role similar U.S. institutions Fannie Mae and Freddie Mac—quasi-government agencies that securitized mortgages—played in the U.S. housing crash. But it’s far from unusual. Several other critics, including economists, realtors, lawyers and analysts contacted by Maclean’s, say they have also been the target of attack. One bank economist who once publicly raised fears about a housing bubble says he didn’t dare openly criticize the CMHC because of the agency’s reputation for snuffing out dissent—an allegation the CMHC denies. The economist spoke on the condition his name not be used.

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Will foreclosures hit Canadian homeowners?

By Jason Kirby - Thursday, December 11, 2008 at 3:35 PM - 6 Comments

The Bank of Canada says that’s a very real possibility. In its Financial System Review today, the Bank warns there’s a growing risk many Canadians could lose their homes if the financial crisis worsens further.

With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and a record-high debt-to-income ratio, a severe economic downturn could result in a substantial increase in default rates on household debt

The fact is foreclosures are already on the rise. Continue…

Real estate prices are falling, and a U.S.-style collapse could cost taxpayers plenty

By Jason Kirby - Thursday, November 27, 2008 at 9:00 AM - 866 Comments

Christopher Judge is accustomed to turning heads in Vancouver. During the decade-long run of the cult hit TV show Stargate SG-1, which was filmed in and around the city, Judge starred as the muscle-bound alien Teal’c. But when the six-foot-three actor appeared in B.C. Supreme Court in mid-November, amid raised eyebrows from the galley, it was for a role he’d desperately hoped to avoid. Judge, who owns three luxury homes in B.C., faces foreclosure. He’d flown up from Los Angeles the night before to ask the court for time to get a new appraisal done on one of his properties, a West Vancouver home with stunning views of the city that he’d bought for $2 million in 2006. At the same time, one of Judge’s former co-stars on the show, Michael Shanks, is facing foreclosure on another sprawling West Vancouver home purchased in January for $4 million. “I was always told the safest place for your money is in the real estate market because it would never drop by 50 per cent, but that’s exactly what’s happened,” a congenial Judge said outside the court. “I watched the L.A. housing market fall and now I’m having to watch the B.C. market go down, too.”

But it’s not just two actors on the hook. Canadian taxpayers, through the Canadian Mortgage and Housing Corp., may ultimately have to make good for any losses stemming from their woes. That’s because mortgages on at least two of Judge’s high-end properties were insured by the government-owned agency. If the foreclosures go through, and the houses are sold at a loss, lenders could turn to CMHC to make up the difference. “This wasn’t some mom-and-pop homebuyer,” says one Vancouver real estate observer familiar with the situation, but who asked not to be named. “CMHC was never supposed to be in the business of insuring speculators.”

Like Fannie Mae and Freddie Mac, the two failed mortgage finance giants that were seized by the U.S. government in September, CMHC’s primary job is to encourage home ownership by making it easier for people to obtain mortgages from banks. And over the decades, the Crown agency did just that, helping millions of Canadians buy a place to call their own. Yet there’s growing evidence that CMHC’s lax policies in recent years ignited a housing bubble in this country in much the same way Fannie and Freddie did in the U.S. The Canadian mortgage industry may not have gone to the same extremes as in the States, and the subprime market was not as big, but experts say lending practices here were far more liberal than first thought. The question now is, will homeowners find themselves squeezed by huge debt loads and plummeting house prices? And if so, how deep will taxpayers have to dig to cover the losses?

In Canada, anyone buying a house with a down payment of less than 20 per cent must purchase mortgage insurance, which protects lenders in the event of a default. But starting in 2006 the CMHC, along with smaller private insurers, raced to loosen their standards. CMHC, with roughly 70 per cent of the market, kicked things off by offering to back mortgages with 30-year amortizations, instead of the traditional 25 years. As rivals like Genworth Financial fought back, amortizations quickly grew to 35, then 40 years. Meanwhile, mortgages could be had with no down payment whatsoever. At the time many in the real estate industry welcomed this competitive tit-for-tat, since it helped thousands of young Canadian families who would otherwise have been shut out of the market. To others, it was a sign Canada was headed down the zany path America’s mortgage lenders had taken. In June 2006, David Dodge, then governor of the Bank of Canada, fired off a gruff letter to CMHC CEO Karen Kinsley warning the new policies were “disturbing.”

When the full extent of America’s housing crisis became apparent this past summer, Ottawa slammed the door on extreme mortgages. As of last month, mortgage amortizations were limited to 35 years, while buyers must now cough up a down payment of at least five per cent. The flip-flop, which CMHC said it supports, is aimed at preventing a real estate crisis here. But critics say the clampdown came too late. In October the average resale price of a home in Canada’s major markets fell 9.9 per cent to $281,133 from a year ago, the fifth straight month of falling prices. “Given the highly leveraged situation of many homeowners, it is quite clear to me that we are not immune to what has happened in the U.S.,” says Moshe Milevsky, a professor of finance at York University. He says a five to 10 per cent price decline over 12 to 24 months could wipe out the equity of hundreds of thousands of Canadians who rushed to buy homes in the last few years. “Bottom line is, there are many Canadians today who own homes they should have rented instead. I’m afraid CMHC was responding to politics as opposed to prudence when they loosened their standards a few years ago.”

CMHC declined an interview for this article. In an email, the Crown corporation said it made it clear at the time that 40-year mortgages “were not for everyone.” The agency says its qualification criteria ensure that “only borrowers with the ability to manage their debts can access our products.” The agency didn’t reply to specific follow up-questions. But interviews with real estate agents, mortgage professionals and economists suggest many homeowners were able to qualify for large mortgages they might have trouble managing in the event of a downturn.

Take, for example, so-called liar’s loans. The term refers to mortgages given to people who can’t document their income. In America the practice was widely abused, since many borrowers simply lied when asked how much they earned. But such loans were available here, too. Last year CMHC trumpeted its new Self-Employed Simplified program, allowing those with no documented proof of income to obtain mortgages, provided they make a down payment of five per cent and have good credit. The result was that in some cases those borrowers with proof of income were at a disadvantage to self-employed workers in the same industry who had no documents at all, since the latter could overstate their earnings. “It got to the point that we could actually get a larger mortgage for somebody who couldn’t prove their income than somebody who could,” says Ajay Soni, a senior mortgage broker with Invis in Vancouver. “On the whole, Canada’s borrowing culture is more responsible than in the U.S., but in some cases risk assessment was thrown out the window.”

Some suggest that’s because Canadian mortgage lenders had nothing to lose. One problem that led to America’s housing crisis was that millions of mortgages were securitized and resold to investors. This meant the companies that originally issued the mortgages to consumers with poor credit histories had nothing at stake if the loans went bad. CMHC may have played a similar role here. “The banks could write as many mortgages as they wanted, subject to being able to get them insured by CMHC,” says one prominent economic analyst on Bay Street who spoke off the record. (Several of the people Maclean’s spoke to for this article expressed concern about reprisal from CMHC, which has come down hard on critics in the past.) “The banks knew they wouldn’t be on the hook.”

Now there are concerns the sudden drop in Canadian house prices, along with rising unemployment, are proving too much for some borrowers to handle. For instance, the number of foreclosure filings in B.C.’s Supreme Court between January and the start of November stood at 928, up 50 per cent from the same period last year. Foreclosure lawyers in B.C. and Alberta have had to hire extra staff to keep up with the workload. Gloria Vinci, a Calgary real estate lawyer, says she’s been astonished to find a large number of cases where homeowners have taken out as many as four mortgages on a property in the span of three years as housing values soared. “I don’t know if this is just the beginning or we’ve reached the peak [of foreclosures],” she says. “But with the massive increase in equity over the last two to three years, people have maxed themselves out.”