“The worst stimulus the government provided has not even hit the balance sheet. It was CMHC providing access to cheap credit for previously unqualified borrowers.”
In 2009, CMHC’s guarantee business broke even at best. CMHC made money, but only because they could borrow at government rates and used the money to buy mortgages at higher rates. The reserves they took in their guarantee business apparently wiped out their income (although because CMHC provides limited financial information, it is difficult to find the truth.
This shows that CMHC’s loosened standards has already caused problems even when housing prices and demand were high and grwoing and rates low and holding.
All this did was:
1) Increased Canada’s reliance on construction for GDP.
2) Push off problems to later periods as credit tightens, interest rates rise and thus this debt fueled consumption falls. On top of that, we don’t know if there will be a gradual or a steep increase in interest rates and the tools the banks have are much more varied than they were in the 1980’s. You want to see a very healthy market? allow prices to find their own non interest rate manipulated levels which are considerably lower than the current inflated prices. Until this happens, you should expect to see many buyers sitting it out, just like we saw in the US market.
3) Created a pending CMHC crises as its equity is insufficient for the level of its guarantees and would disappear with minimal drops in prices (for example, of the $500+ billion in guarantees, 3% ($150 billion) have less than 5% equity). When housing prices are at decent, affordable levels everyone makes plans on eventually buying. When they are at the current levels, only generational low interest rates bring in the buyers but many more buyers stay out as they realize that the rates have no where to go but up.
Floating mortgages at 2.5% interest rates equals Canada’s very own version of Sub-prime. There is no difference. In the US, those that could least afford or barely afford their overpriced Real Estate were foolishly buying houses based on 2 to 4% “Teaser rates” as they called them. Than, after a couple of years those rates reset to 5,6,7%. We are no different. Our “Teaser rates” are named floating mortgage rates and they are also pulling in the suckers.
Do you want to know how this story ends? Just look across the border. We are following the US every step of the way. Once rates start climbing, and those with the “Teaser rates” try to lock in, they will be shocked to see that the new locked in non floating rates will be. 2,3 maybe even 4 times what they were currently paying.
Bank of Canada’s Carney is also complicit in this, keeping rates low for too long despite the Greenspan lessons low and doing his best to brush off the last increase. Higher rates are necessary to stave off a US style slowdown which unfortunately has already started in construction (offset only by deficit fueled stimulus).
Let the economy find its own equilibrium, get involved when it is too hot to slow it down, don’t just throw money at the problem today.
Our question is, why aren’t CMHC’s practices more in the news? We hear about Greece daily yet do precious little to stem our own problems when we have the chance?
What we have here is the ’seen vs. unseen’ fallacy at work.
Government produces no wealth. They take wealth from others and redistribute it to others under their monopoly of the monetary system and violence. Let me illustrate with an example:
A and B (usually a government committee, hence A and B) put their heads together and decide what C shall be made to do for D. All eyes are on how D benefits. Endless political commentary and punditry abound around D. A and B is the State. C is the person who does productive economic work and pays taxes extorted via A and B and D is the recipient of the swindled money from C, less the cut that A and B squander on themselves or their favored insiders.
What is not seen is the economic benefits of what C might have done if C was allowed to retain his money and spend it as they saw fit. Existing businesses would not receive C’s money anymore or future businesses may not come into existence if C had retained their money to demand it. In other words, current and future businesses effectively subsidize D, favored by A and B.
A and B have another mechanism to swindle C; devalue the money s/he has in their pockets by printing new currency into existence to finance D. This new currency has an inflationary effect on C’s savings for today, tomorrow, or passed onto C’s children. Government sponsored inflationary attacks on C by the State/Banking cartel rob C in such a manner that not one in a million C’s can diagnose. C pays for D via inflation, not taxation.
The most skilled statistician cannot tell you what millions of C’s would have done, today or tomorrow, had they been allowed to retain their money (or the value of it) to spend into the economy.
C is the forgotten man.