Housing Bubble and Mortgage Policy Controversy

The last week or so has seen a huge increase in the number of articles being written about mortgage policies in Canada. Everyone seems to have an opinion on everything from government policy, CMHC policy (these are not necessarily the same thing), bank lending policies, whether we’re in a housing bubble, not in a housing bubble, or on the verge of a housing bubble, and whether or not we’re headed for US-style mortgage and housing meltdown.

So? Any thoughts?

I’ll try to present as many of the better arguments below, but first, I thought I’d give you my personal take from a fundamentalist point of view.

1. Home ownership is a noble goal and higher rates of home ownership indicates a healthy populace and economy.

2. Home ownership is NOT a right! Everyone does not deserve to own a home. Some people should definitely NOT own a home.

3. When some people lose their home, as sad as that is, it is a sign of a functioning economy.

4. Governments should not implement policy that distorts reasonable risk taking by lenders – or any other business for that matter. If a financial institution isn’t willing to risk their money but starts making different decisions because they can risk tax payer money, it’s bound to end up badly – at least for the tax payer.

5. You can’t eat your house. Home ownership should not be the only asset class people participate in prior to retirement. Didn’t we all read the fable about putting too many eggs in one basket? Too many home ownership incentives creates a population overly dependent on, and sensitive to, the value of homes. When markets correct, it can place undue strain on those who are depending on that home for retirement.

6. Macro policy changes can act as a sledgehammer instead of a finishing nail in a really big country (geographically) that has very different housing markets. A national policy may have the desired effect in Vancouver, but a deleterious one in Edmonton or Markham. One could make the argument that government shouldn’t intervene – pro OR con – for that very reason. Markets are far more efficient.

7. I have no issue with insurance providers adding a layer of security and certainty to the lending process for financial institutions – as long as that insurance market is strong, competitive, and mostly private. Tax payers shouldn’t be on the hook for private enterprise’s lending decisions – especially when policy influences those decisions and encourages more liberal lending policies.

I’d love to hear your thoughts on this. In the meantime, we’ll have to read the ‘experts’:

Peter Foster – CMHC = Canada Moral Hazard Corp

Globe and Mail – Ottawa Weighs Stricter Mortgage Rules

Rob Carrick – It’s not the mortgages, it’s the borrowers

(Incidentally, why do the big banks need to ask the government to raise the minimum down payment to 10%? If they’re so worried about it, why don’t THEY raise THEIR minimum down payment? They can have whatever lending policy they want.)

The skeptic in me thinks that the big banks may want tighter lending rules for first-time buyers as a way to capture back market share from mortgage brokers, who do substantially better with first-time buyers than any other category. Hmmm…

Fraser Institute – We Should Privatize CMHC and The Globe’s take

Bubble? What Bubble? – Home Capital

David Dodge says CMHC should be careful

Stephen Jarislowsky (seriously smart guy) is convinced there’s a housing bubble in Canada

On the other hand, the Calgary Herald reports new home price drops in Calgary, Victoria, and Edmonton in 2009.

Carney says no need for structural change in Canadian Mortgage market

Wall Street Journal talks ‘aboot’ Canadian housing bubble

The CEO of ING agrees with me: ING boss urges Flaherty to not tighten rules too dramatically

At the end of the day there are lots of opinions about what’s going on. Here’s my advice to make sure it doesn’t affect you:

1. Don’t lose your job. More people lose their homes to lost income (and usually to disability or injury, so get your insurance topped up) than interest rate increases.

2. Borrow less than you can afford at today’s rates. Let’s pretend rates were twice as high and see if you’re still comfortable with the payments.

3. Stick to the fundamentals. Buy good properties for long periods of time. Don’t speculate and especially right now, DON’T try to get rich quick on real estate – especially in Canada.

Last but not least, if you have any questions, contact a mortgage broker and we can try to help!