The arrival of buyers like Ms. O’Brien and Mr. Silva has changed the market, however. Home buyers have responded to low rates and easy mortgage rules “by bidding up the price of houses,” said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.
“You can never really provide cheap housing,” argues Moin Yahya, associate professor of law at the University of Alberta. “All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.”
How much did the mortgage rule changes contribute to the steep rise in home prices? That’s not clear. Low rates and rising incomes have been significant factors, as has a perception that real estate is a more stable place to invest than, say, the stock market.
What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.
The market starts to unravel
As CMHC was making it easier than ever to get a mortgage in Canada, it was also profiting from the boom. Its profits soared, rising from $376-million in 2000 to $1.03-billion in 2006.
Its balance sheet swelled. In 1996, CMHC was the insurer on $131-billion worth of mortgages; a decade later, it had more than doubled, to $291-billion. (It has since almost doubled again, to $576-billion by the end of September.)
By 2006, the year Stephen Harper’s Conservatives took office, Department of Finance officials started to think about how to take some of that risk off the government’s books. They mooted the idea of privatization. CMHC was a large, healthy corporation, already competing with private sector rivals. It looked strong enough to go out on its own.
A source close to the CMHC told The Globe and Mail that the discussions were serious. Had the global economy stayed robust, it’s likely the Tories would have proceeded with selling the business.
That, of course, is not what happened.
By the summer of 2007, two things had become obvious. First, the U.S. real estate market was in trouble, with serious implications for its economy; second, problems in “subprime” mortgages – those given to riskier borrowers – were beginning to choke the credit markets.
Within a year, Fannie Mae and Freddie Mac – two U.S. financial institutions whose mandate, like CMHC’s, is to promote home ownership by greasing the wheels of the home lending market – were nearing collapse and Washington started planning their nationalization.
The risks of easy money were now clear, and Mr. Flaherty was forced to respond. In July, 2008, he announced that government-backed mortgage insurance would no longer be eligible on 40-year mortgages. The new maximum was 35, and a down payment of at least 5 per cent would be required. The rules were scheduled to kick in Oct. 15.
By the time that date arrived, though, bad mortgage debt had tipped the world into a full-blown financial crisis; a global recession soon followed. Oil prices plunged, Canada’s manufacturing sector seized up, and companies began laying off thousands of workers.
Ottawa had a few levers to try to cushion the drop. The real estate market was one of them. Mr. Flaherty and his mandarins realized that CMHC could play a useful role. By using its balance sheet, it could ensure that banks had the money so they would keep lending during the crisis.
So in early October – the week before his new mortgage rules took effect – Mr. Flaherty placed a call to a high-ranking CMHC official to deliver a command. The Crown corporation would need to start buying tens of billions of dollars in mortgages from Canada’s banks, giving those banks cash to make new loans.