After Decades of Stoking Mortgages, Ottawa in a Mess of its Own Making
It has been a no-brainer for the banks. The program was so popular that lenders had used up nearly 80 per cent of this year’s available government guarantee by the end of July – even as the real estate market slowed.
But the episode highlights a troubling upshot of the real estate boom.
The federal government has had a major role in stoking the rapid expansion of mortgage credit in Canada. Now, as the long credit-fuelled rush into real estate appears to be stalling, taxpayers could be stuck with a large and unexpected bill.
Three-quarters of all Canadian mortgages are insured by the federal government, up from only 30 per cent in 1988. Ottawa guarantees a total of $900-billion worth of mortgage insurance.
It would take a spectacular crash for the government to have to pay out on all that insurance. But for a sense of scale, the $900-billion exposure dwarfs the federal government’s net debt of $676-billion.
It is now clear that Ottawa is not only worried about homeowners borrowing too much. The government is also concerned about its own exposure, and it’s scrambling to limit the potential risk to taxpayers.
The irony is that it is a problem almost entirely of the government’s own making. Starting in the late 1970s, successive Liberal and Conservative governments made it a national policy to aggressively encourage home ownership. The government offered mortgage insurance to all homeowners via CMHC, then it expanded those guarantees to private mortgage insurers.
In the 1990s, the minimum down payment on mortgages was dropped to 5 per cent from 10 per cent. In 2006, CMHC introduced a no-down-payment insurance product and it extended mortgage insurance to cottages and second homes.
Efforts gathered steam in the early 2000s, with the creation of government-backed mortgage bonds and the decision by CMHC to remove the $250,000 cap on the size of mortgage it would insure. Ottawa would eventually reimpose a cap of $1-million.
The government also lengthened the maximum amortization period for mortgages from 25 years to 30 years in 2005, to 35 years in 2006 and eventually 40 years (it has since been set back to 25 years).
The final incentive to expand the availability of mortgage credit was the insured mortgage purchase program, which enabled banks to sell their government-backed mortgage bonds back to CMHC at a profit.
All these programs were 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.
“The evidence is fairly telling,” analysts at corporate bond manager Canso Investment Counsel Ltd. of Richmond Hill, Ont., argued in a recent newsletter. “Housing became more expensive for Canadians because of the misguided efforts of the CMHC to make mortgages easier to obtain.”
Canso estimates that the combined impact of successive federal programs may have added as much as 50 per cent to house prices in key markets, such as Toronto. Canso estimates that the “affordable” price of an average two-storey home in upscale North Toronto is $615,000 – well shy of the actual price of $900,000.
As Canso bluntly puts it: “Canada borrowed its way out of the 2009 recession by stoking our residential housing market to absurd levels. We cannot afford the houses we are in.”
Ottawa is now wisely unwinding many of its pro-home-ownership policies.
It’s not yet clear if these efforts will produce a soft landing or a more disorderly unwinding, as some analysts fear.
Looking back, Finance Minister Jim Flaherty’s constant badgering of Canadians about excessive borrowing may have been a diversion.
He could have worried more, and sooner, about the government’s own behaviour in pumping up house prices.