Only a few years earlier, in the depths of the crisis, government policy encouraged consumers to borrow. Now the message has changed. First-time buyers are particularly affected by the new regime. People such as Ms. O’Brien and Ms. Egerton, who benefited from the easing of government policies before, would no longer be able to buy homes on those same terms today.
CMHC’s future role
Six months after Mr. Flaherty’s latest crackdown, the “excessive exuberance” that once defined Canada’s housing market has disappeared.
Home prices have not fallen much, but sales activity has, particularly in Greater Vancouver. Some who earn their living in the real estate business now blame the government for overcompensating in response to the heated housing market, and that Ottawa should not have meddled a fourth time in CMHC’s rules.
But it will take much longer to answer the really big questions. Has the government managed to engineer a healthy correction in home prices – or something much worse? If prices do fall sharply, what will that mean for CMHC and its competitors, who now backstop nearly three out of four mortgages?
CMHC, which dominates the market by a wide margin, had about $286-billion of insurance outstanding, as of the end of 2011, on mortgages where the homeowner had a down payment of less than 20 per cent. It has a large cushion to absorb potential losses, but how steep would those losses be if the property market were to suffer a hard landing? “What’s immediately at risk in the event of a significant downturn is the capital of CMHC, which is about $12-billion, so once they blow through that, then they start turning to the public purse,” says Finn Poschmann, vice-president of research at the C.D. Howe Institute.
“To blow through that, you need unemployment that stays high for a little while and a significant increase in the number of mortgage defaults. That’s not farfetched – it has happened before. We like to think that it won’t happen, and that we’re better at managing those risks, but good things happen and bad things happen and they’re very difficult to predict.”
Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.
Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.
Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.
“There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said.
Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand.
Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,” Mr. Dodge said.
Even some former CMHC insiders are now calling for a radical rethinking of what the institution does.
Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,” including “an honest evaluation of CMHC’s relationship with our major financial institutions.” Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.
Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a recent interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.
But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep.
“The system as a whole is too big to fail,” he says.
“And when something is too big to fail, the government will come in.”