Does anyone else out there get a sense of deja vu reading this from Macleans (emphasis added)?
David LePoidevin isn’t the first person to suggest Canada’s roaring housing market is headed for a U.S.-style crash. But he is a rare breed of money manager for daring to point a finger at the Canada Mortgage and Housing Corporation, the country’s biggest mortgage insurer. In a fall 2009 note to his clients, LePoidevin questioned what was underpinning the country’s skyrocketing home prices, aside from rock-bottom interest rates. “The stock market was sure not providing huge capital gains to the masses,” he wrote. “Did the banks all of a sudden open up the lending spigots? In fact banks have actually reduced the number of their mortgages held from the peak of third quarter of 2008. The smoking gun is the CMHC and its securitization policies.”
As mainstream economic commentary in Canada goes, it was damning stuff. And it provided ammunition to critics who argue the Crown corporation’s policies have inflated a housing bubble. The CMHC is arguably the most influential player in Canada’s $1-trillion housing market. Its main function is to provide mortgage insurance for prospective homeowners who put less than 20 per cent down on their houses, protecting the banks in the event of defaults. The CMHC also helps to spread risk by finding investors to buy CMHC-insured mortgages that have been pooled together into so-called mortgage-backed securities. All of this is guaranteed by the government.
I swear I’ve seen this movie before – and it doesn’t have a happy ending.
I’m not the only one (same link, emphasis added again):
It’s a familiar-sounding story to American ears. “The Canadian government mortgage apparatus echoes uncannily our experiences down here with Fannie and Freddie” says Jim Grant, author of the widely read Grant’s Interest Rate Observer newsletter. “CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads.”
Grant and other critics argue the CMHC’s balance sheet looks strikingly similar to both Fannie and Freddie . . .
Oh dear.
Now, it should be noted that Canada is also riding a resource boom (the Great White North is our largest source of imported oil, by far – to the tune of nearly double what Saudi Arabia sells us), but oil has fluctutated wildly over the last two years, and no one in the summer of 2008 expected the commodity to lose half its value by Christmas.
Even if that doesn’t happen again, Canada’s housing market – which ironically was praised as being a far safer bet in 2008 than ours – could do the same damage north of the 49th that we have seen here on the south side of the border.
Stay tuned.
