Three-headed monster

Governments have many different ways to stimulate the economy or push a particular social agenda. Such was the case in 1954 when the government created the Canada Mortgage and Housing Corporation (CHMC), an insurance backstop to encourage banks to loan money to first time purchasers of homes.
Sixty-two years later this system is still in place even though conditions have radically changed. Today Canada is very vulnerable to an American-style housing crisis and multi-billion dollar bank bailout.
There are three serious challenges for the Canadian government. First, over-priced housing not only in Toronto and Vancouver, but right here in Alberta.
If housing was actually following market forces, the current number of layoffs in Alberta should have forced housing prices dramatically downward.
Yet housing prices in cities like Calgary, Red Deer and Edmonton have seen only modest decreases.
Second and most concerning is the personal debt load that Canadians are carrying. Our debt load is the highest ever in the history of Canada and greater than any other G7 nation.
The third issue, of course, is the low interest rates which have negatively affected everything from savings to retirement security.
No first-world country and certainly not Canada would be able to raise interest rates today. It’s a ‘no go’ given that first-world economic growth for 30 years has been built primarily on debt.
In Canada house costs are too high, personal debt too high and interest rates too low. One percentage increase and think about all those who would default on their mortgages.
Yet, how many Canadians know that we the taxpayers essentially assume most of the risk for insured mortgage defaults in Canada?
I knew that taxpayers insured 100 per cent of the risk associated with CHMC mortgages, but only recently learned that we also backstop 90 per cent of insured mortgages held by big banks, credit unions and mortgage companies.
Is it any wonder that lenders are constantly pushing home buyers to go for bigger homes and bigger mortgages when those purchasers qualify for mortgage insurance?
Using government figures, I’ve estimated that taxpayers are currently insuring $780 billion worth of mortgages. If there are defaults on these insured mortgages, we the taxpayers pay out to the lender the principal plus lost interest.
Finance Minister, Bill Morneau, has made two good moves this year. First, for homes over $500,000, a 10 per cent minimum down payment is required. This change still promotes first-time purchases, but saves people with small down payments from getting in over their heads.
In October, a new stress test for insured mortgages was imposed whereby family incomes must meet a higher interest rate threshold than current rates.
Again, this saves families from losing their homes when the interest rates move up a point or two and further protects taxpayers from massive defaults.
The three-headed monster—housing costs, personal debt and interest rates—has the potential to bring Canada financially to its knees if not managed properly.
Finance Minister Morneau appears to be up to the task, but his next big challenge will be introducing some risk-sharing balance into the mortgage insurance equation.
Banks and mortgage companies are private sector businesses and should assume the risks of their business model rather than we, the unsuspecting Canadian taxpayers.

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