Wednesday, April 2, 2014

Harper to blame for Canada's housing bubble

Jim Flaherty tried pawning himself off as a prudent manager of Canadian banks and diligent tamer of the housing bubble. But in reality, he was trying to undo damage the Harper Government caused in the first place.

US banking-deregulation catastrophe

While in opposition, Harper demanded the Liberal government get in on the red-hot action of America's financial sector by importing US banking deregulation.

Thankfully, the Liberals did not. In 2008, financial-market meltdowns crippled the US and many other countries, requiring massive bailouts.

Harper's banking deregulation

In 2006, when Harper came to power, he implemented his own deregulation scheme by loosening rules governing mortgages and the CMHC (federal mortgage insurance agency.)

According to the Globe and Mail these measures acted

like rocket fuel for the real estate market in a low-rate environment. They triggered a rapid expansion of risk-free mortgage credit, and, arguably, drove the rapid runup in house prices in the past decade.

Summary

Here's a summary of Harper's actions:

  • Maximum mortgage periods raised from 25 years to 40.

  • Minimum down payment reduced from 5% to 0.

  • CMHC insurance provided for 40-year no-money-down mortgages.

  • CMHC insurance cap raised from $250,000 to unlimited.

  • Banks allowed to offload risk by buying insurance on homes with more than 20% down-payment (which the owners, themselves, don't require.)

CHMC train wreck

The CMHC was originally created to help first-time home buyers. Under Harper's “steady hand,” banks were permitted to offload risk from inflated house prices onto taxpayers:

CMHC Insurance

Kind 2005 2006 2007 2008 2009 2010 2011 2012
(Billions of $)
Home owner 219 232 246 271 286 290
Bank 103 148 196 209 243 230
Multi-unit 23 28 31 34 38 46
Total 274 291 345 408 473 514 567 566

Under Harper, the CMHC's total liabilities more than doubled.

From 2007 to 2012 (where data is available,) home-owner insurance increased a modest 32%.

But the amount of bulk insurance banks bought — on homes that didn't require it because owners paid a large down payment — increased a whopping 123%!

Conclusion

As the Financial Post points out, the Harper Government

has been creating a housing bubble in Canada with taxpayer money, which is why residential real estate prices rise in defiance of high unemployment and recession.

Before stepping down, Jim Flaherty said the CMHC should be privatized. That's rich coming from him. Under his watch, the CMHC nationalized over $150-billion of private-sector risk.

Canadians have yet to discover the true cost of this moral hazard. But we should know that Harper has involved us in a contemptible bet: heads, banks win; tails, taxpayers lose.

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