Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.

The housing bears have been largely in hibernation since second quarter residential sales numbers from the Canadian Real Estate Association rebounded sharply after five straight quarters of decline. But a report from Richmond Hill corporate bond manager Canso Investment Counsel has stirred the discussion back up. While most of Canso's report contains things we already know, as well as a healthy dose of fiery rhetoric, one point demands attention due to its similarity to analysis of the U.S. crisis: inflated mortgage appraisals artificially drive up prices, a dynamic that becomes dangerously unsustainable.

The point that has been made over and over is that prices in cities like Toronto and Vancouver have far outpaced both incomes and inflation. Canso estimates quite reasonably that, based on a Toronto family spending 30 per cent of Statistics Canada's average pre-tax income, that family ought to be able to afford a 25 year mortgage valued at roughly $600,000. The average price in Toronto is currently $900,000. Is this a huge problem? The debate rages on, and I will not attempt to end it here.

Story continues below advertisement

That said, Canso's reference to allegations that the CMHC's automated mortgage appraisal system, EMILI, has allowed lenders to artificially inflate the appraised value of a home, are well worth revisiting.

"EMILI uses an "algorithm" which looks at the address, and particularly the postal code, and metrics of the house to be insured. The key variables are the square footage of the house and the prior sale prices for the geographic area of the house. It is our understanding from real estate professionals and bankers that there has been extensive "gaming" of this system and excessive prices generated by this system. If a higher price is required for CMHC insurance coverage, the square footage, which is input by the lender and supplied by the mortgage broker, can be increased as required."

Again, nothing new here – the alleged gaming of EMILI was investigated by the Globe last December. At the time, CMHC reps defended the system, pointing out built-in safeguards and citing Canada's low default rate since the system was introduced in 1996. But if they're wrong about the risks, we could be in for a dose of what our southern neighbour recently suffered. A new article by law professor and former bank regulator William K. Black shows that inflated mortgage appraisals contributed enormously to the U.S. housing crisis – arguably as much as the no-document "liar loans" and the like, which Canadians fervently insist could never happen here – and we should be well afraid of them.

Mr. Black cites a report observing that between 2000 and 2007 members of the appraiser industry presented Washington officials with a petition signed by 11,000 appraisers alleging that "lenders were pressuring appraisers to place artificially high prices on properties…. 'blacklisting honest appraisers' and instead assigning business only to appraisers who would hit the desired price targets." The petition went nowhere. The Globe article and Canso's report contain allegations of depressingly similar practices in Canada, yet there is no equivalent petition here, which, given our notoriously poor protection for whistleblowers and the like, is perhaps not surprising.

Mr. Black explains that "the industry used "low" [loan to value] and [debt to income] ratios as its compensating factors for doubly fraudulent loans." For example, a lender might defend a mortgage issued on a $900,000 home by insisting on a large downpayment, such as 50 per cent down ($450,000). In Canada, lenders and CMHC alike point to high loan to value ratios as proof that their mortgages are safe. However if the value of the home in our example drops by 30 per cent to $630,000, the odds of the person breaking their mortgage dramatically increase, no matter what the downpayment was. And if $630,000 houses are being appraised with any frequency at prices that are grossly inflated above long-term values, we can expect a significant number of those mortgages to go bad – even in Canada, where lenders can still pursue a borrower even if they walk away from their home.

The housing bust so far hasn't materialized, but the era of easy credit is beginning to ebb, thanks to federal mortgage regulations and rising rates. The other shoe has yet to drop, and if it lands on property valuations with a resounding thud, we can't say we weren't warned.

Dave Morris is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Dave on Twitter at @morrisdave.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies