Each week there seems to be another release surrounding the fate of the Canadian real estate market … is there a bubble and will it burst? And what about those CMHC changes and the hurdle that first time home buyers are faced with? On one hand you have advocates who attribute Canada’s well-functioning housing financial system to CMHC’s supportive program and on the other hand you have the Chicken Littles crying that the sky is falling.
Why CMHC Was Created
The Bank Act in Canada does not allow federally regulated financial institutions to extend a residential mortgage over 80 per cent loan to value unless the said mortgage is protected by mortgage insurance. CMHC was created in the 40’s after World War II by the government to assist returning soldiers entering the housing market. Their mandate is not to increase the rate of home ownership, rather they “encourage the availability of housing across a variety of tenure types”.
Living the Canadian Dream
Home ownership in North America is much more of a cultural phenomenon than it is in other parts of the world. In Canada, home ownership numbers are a chart topping 70 per cent whereas the U.S. is currently sitting at a 15-year low at 65.4 per cent. Compare that to 70 per cent of Europeans who rent vs. own and you can really see how CMHC has helped us “live the Canadian dream”.
It’s crazy to think that some cultures do not even think about home ownership until they have 70-80 per cent saved for a down payment. But CMHC is not the only reason for Canada’s impressive numbers; we also have our prudent lending practices, sound banking system and regulatory oversight (to name a few) to thank. In places like Paris, Amsterdam and London, disposable income is relatively lower and the price of housing is quite a bit higher. Since the average person finds it difficult to purchase a home, the rental stigma isn’t as severe in these areas.
CMHC: Friend or Foe?
Personally, I side with CMHC and they’re a friend of mine. Maybe it’s due to my cultural disposition and mentality towards the ultimate goal of home ownership, but I know that I would surely appreciate the support should I lack the required 20 per cent down payment. It is increasingly difficult to get ahead without a great paying job. You’ve got your everyday bills, entertainment, rent, insurance, commuter expenses, student loan payments … the list goes on and on. Did you know that it takes the average Canadian 12 years to save for a five per cent down payment? Check out this fantastic infographic!
On the other hand, Ben Rabidoux, the creator of the Economic Analyst blog makes a good point when he says that CMHC “(doesn’t) provide affordable housing, they provide affordable financing. And when all you do is provide affordable financing, you inflate home prices”. Agreed, CMHC has inadvertently contributed to inflated home prices in Canada; however I’d argue that they inhibited the sub-prime mortgage market to reaching toxic levels which is exactly what happened in the States and ultimately lead to the demise of the American economy.
On The Chopping Block: The US of A
Fannie Mae and Freddie Mac are government-sponsored enterprises who support the mortgage lenders of the states by securitizing or buying the mortgage loans that they originate which enables the lenders to replenish their funds so they can lend to other home owners. In America, lenders are not legally required to use mortgage insurance however most do since Fannie Mae and Freddie Mac require that any high ratio mortgage in their book is insured.
If your home is foreclosed in Canada, the lender can come after you for any unpaid mortgage debt plus any fees incurred in the sale (aka full-recourse loans). Whereas in many jurisdictions in the States, mortgages are non-recourse meaning that home owners can literally walk away from their homes and mortgages, leaving the lenders with no recourse beyond the said property. Think about the repercussions of this with the underwater homes in America. You have two options as an American in these jurisdictions: you can either walk away from your home and the debt load which outweighs the value of your home, or you can continue to pay off your debt.
The sub-prime market really took off in the US which was fueled by third party mortgage originators who focused on the poor, working class cities that were hit hardest by the economic downturn. These brokers encouraged refinances and neglected to explain the full sub-prime mortgage product, how it would reset after two years and how interest rates would double. The crippling effect of the interest rate hikes lead to an abundance of repossessions, plunging property prices, billions in losses by banks and the slowdown in the US economy.
RateSupermarket.ca Week in Review
Notable changes this week that you’ll be happy to hear to our best mortgage rates about include a 5 bps decrease in both the 10 year fixed and 5 year variable rate which sit at 3.79 and 2.60 respectively. However, the biggest move this week was an increase to the 4 year fixed rate which bumped up 15 basis points and sits at 3.04 per cent.