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Sarah O’Brien and her husband Darryl Silva were able to buy a home a few years ago because their 35-year mortgage kept payments low. (Chris Young for The Globe and Mail)
Sarah O’Brien and her husband Darryl Silva were able to buy a home a few years ago because their 35-year mortgage kept payments low. (Chris Young for The Globe and Mail)

Ottawa’s $800-billion housing problem Add to ...

Those are the reasons that Finance Minister Jim Flaherty has been trying to halt the rise in debt and engineer a soft landing in the real estate market. A crash in home prices wouldn’t just cause untold financial pain for Canadian homeowners – it has the potential to expose the federal government to huge liabilities for their mortgages.

How we got to this place is not merely the story of a historic boom in real estate. It’s also the story of an institution that has grown into something it was never intended to be.

 

The evolution of CMHC

CMHC was an idea of the postwar government of Mackenzie King, who saw a need for federal intervention to find a place to live for tens of thousands of soldiers who were coming home. It also built some of the first social-housing projects in Canada.

At the time, home ownership was out of reach for many Canadians, even those in the burgeoning middle class. Lenders usually required a down payment of about 50 per cent, and the mortgage business was not very competitive, dominated by a small number of trust companies and insurers.

In the mid-1950s, Ottawa moved to change that, opening the doors to banks to grant mortgages and asking CMHC to begin offering mortgage insurance. The insurance kicks in if the homeowner fails to make payments on the loan, compensating the lender for any losses.

The creation of a federal guarantee knocked down one of the major barriers to entry in the housing market. Now it was possible to buy a home with a down payment of just 10 per cent; lenders would advance the money, knowing they were protected by Ottawa from bad borrowers and falling property markets. Home ownership rates went up; by the early 1970s, about six in 10 Canadians lived in a house they owned.

Still, the system had its limits. One was on length: CMHC would only guarantee mortgages of 25 years or less, to encourage people to pay off their homes in a reasonable time.

The length of a mortgage has a major impact on its cost to the borrower. Consider two homeowners taking out an identical $400,000 mortgage, at 4 per cent interest, making monthly payments.

The first pays off the loan in 25 years, shelling out $231,000 in interest over that time. The other takes 30 years, in order to enjoy lower payments along the way. But that extra five years adds more than $53,000 to his interest bill.

Mortgage insurance is also expensive, and in the past, most home buyers tried hard to scrape together the minimum down payment needed to avoid it. (Since 2007, that minimum has been 20 per cent of the purchase price; before that, it was 25 per cent.) In 1992, just one in five mortgages was insured.

CMHC quietly served this slice of the home-buying public and was largely ignored by its political masters. Canadians are reliable when it comes to repaying their mortgages, so insurance claims were minimal, and the company made money for the government.

Meanwhile, after an early-1990s correction in some regions, Canadian home prices began a long upward march. By the middle of the past decade, the country was in the middle of a virtuous circle. Higher home prices made a lot of consumers feel wealthier, fuelling consumer confidence, which in turn pushed up house prices even more. In 2006, the average price of a home in Canada had surpassed $250,000.

But prices were just about to really take off.

In 2006, the new Conservative government in Ottawa allowed CMHC to tinker with its tried-and-true formula. One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length.

The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.

“We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,” Ms. O’Brien said. “We probably would have waited.”

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