One aspect that isn’t discussed very much is the explicit government backstop of mortgage finance. This allows the banks to lend with impunity. Low rates alone don’t explain why banks are giving out ridiculous mortgages to people who can’t afford them. The explicit government insurance is the key.
Starting in 2001, the CMHC expanded their NHA Mortgage Backed Securities program. The banks create the mortgages, bundle them into securities, the CMHC puts a GUARANTEED stamp on them, and investors buy the securities. Those securities are as secure as Government of Canada bonds. This is now an $11 billion per month operation, with about half a trillion dollars worth of mortgages guaranteed by the full faith and credit of the crown. Investment flows to the guaranteed mortgages instead of to productive businesses.
It would be one thing if these guarantees went into 30 year mortgages for normal families, with the goal of creating stability for citizens, but they’ve gone into all kinds of speculation and chicanery.
The other one is the explicit government guarantee of ALL residential mortgage insurance, public and private. The Protection of Residential Mortgage or Hypothecary Insurance Act was passed in 2011, and guarantees the payment of mortgage insurance benefits for private insurers (for a 10% fee) even if they go bust. The moral hazard is incredible. Why invest in risky commercial ventures when residential mortgages are guaranteed?
Look behind the curtain of Canada’s “strong, stable, and prosperous” banking sector and you’ll find the government quietly propping the whole thing up.
Thanks for this. Yes, that explains it. It effectively means they have a private license to print money with total investor protection.
When I look at the context of the dates, 2001 followed the dot-com crash and 2011 was after the global financial crisis. Some of this would be Canada following the lead of the U.S.
There has been a gradual relaxing of various kinds of regulations since the 1960s, but it follows the pattern of all booms and busts, which goes back centuries. Part of the reason to lend to someone who can't afford it is that you can seize the property afterwards.
I don't even think it's a particularly nefarious scheme. The banks don't want to seize properties, they just want to make money without risk. Hey, if you just guarantee all our assets, we can issue more loans and stimulate the economy and you can get economic growth without more of that Bad Bad Government Spending showing up in the budget.
From the perspective of the government, this is all good news. Increasing homeownership is good! Banking stability is good! Expanded access to credit is good! Rising homeowner wealth is good! Growth without a big government deficit is good! Foreign investment is good!
But nobody bothered to ask renters or future homeowners. Nobody wants to stop the party. We have a YIMBY movement that just wants to build more and more, but without fixing the finance side, we'll just supercharge a broken system. More units to feed into the machine.
Exactly. It's "unintended consequences" in the hundreds of billions of dollars, while economists and analysts are told, and taught, that various economic indicators and measures don't matter.
Excellent post! The banks have dedicated more and more money to mortgages and less and less to productive invesment. They need guardrails. If we can reduce housing prices, the banks would look more more productive investment. Here are a few guardrails.
- The Wall Street Journal has a video, 'The Invisible Role Taxes Play in America’s Housing Shortage'. The land value tax discourages people from hoarding and speculating on land. https://www.youtube.com/watch?v=gJqCaklMv6M
- Banks need higher standards on the appraisals they give. Business loans are based on earnings. House loans could be based on the potential rent after costs. There is no way the appraisals can be justified on that basis.
- No loopholes for rent controls like vacancy exception.
- Housing speculation and flipping should not qualify for capital gains tax rates. Nor should selling commercial real estate second residences etc.
One aspect that isn’t discussed very much is the explicit government backstop of mortgage finance. This allows the banks to lend with impunity. Low rates alone don’t explain why banks are giving out ridiculous mortgages to people who can’t afford them. The explicit government insurance is the key.
Starting in 2001, the CMHC expanded their NHA Mortgage Backed Securities program. The banks create the mortgages, bundle them into securities, the CMHC puts a GUARANTEED stamp on them, and investors buy the securities. Those securities are as secure as Government of Canada bonds. This is now an $11 billion per month operation, with about half a trillion dollars worth of mortgages guaranteed by the full faith and credit of the crown. Investment flows to the guaranteed mortgages instead of to productive businesses.
It would be one thing if these guarantees went into 30 year mortgages for normal families, with the goal of creating stability for citizens, but they’ve gone into all kinds of speculation and chicanery.
The other one is the explicit government guarantee of ALL residential mortgage insurance, public and private. The Protection of Residential Mortgage or Hypothecary Insurance Act was passed in 2011, and guarantees the payment of mortgage insurance benefits for private insurers (for a 10% fee) even if they go bust. The moral hazard is incredible. Why invest in risky commercial ventures when residential mortgages are guaranteed?
Look behind the curtain of Canada’s “strong, stable, and prosperous” banking sector and you’ll find the government quietly propping the whole thing up.
Thanks for this. Yes, that explains it. It effectively means they have a private license to print money with total investor protection.
When I look at the context of the dates, 2001 followed the dot-com crash and 2011 was after the global financial crisis. Some of this would be Canada following the lead of the U.S.
There has been a gradual relaxing of various kinds of regulations since the 1960s, but it follows the pattern of all booms and busts, which goes back centuries. Part of the reason to lend to someone who can't afford it is that you can seize the property afterwards.
I don't even think it's a particularly nefarious scheme. The banks don't want to seize properties, they just want to make money without risk. Hey, if you just guarantee all our assets, we can issue more loans and stimulate the economy and you can get economic growth without more of that Bad Bad Government Spending showing up in the budget.
From the perspective of the government, this is all good news. Increasing homeownership is good! Banking stability is good! Expanded access to credit is good! Rising homeowner wealth is good! Growth without a big government deficit is good! Foreign investment is good!
But nobody bothered to ask renters or future homeowners. Nobody wants to stop the party. We have a YIMBY movement that just wants to build more and more, but without fixing the finance side, we'll just supercharge a broken system. More units to feed into the machine.
Exactly. It's "unintended consequences" in the hundreds of billions of dollars, while economists and analysts are told, and taught, that various economic indicators and measures don't matter.
Heartbreaking and needless
https://www.pbs.org/newshour/show/half-of-american-renters-pay-more-than-30-of-income-on-housing-study-shows
Excellent post! The banks have dedicated more and more money to mortgages and less and less to productive invesment. They need guardrails. If we can reduce housing prices, the banks would look more more productive investment. Here are a few guardrails.
- The Wall Street Journal has a video, 'The Invisible Role Taxes Play in America’s Housing Shortage'. The land value tax discourages people from hoarding and speculating on land. https://www.youtube.com/watch?v=gJqCaklMv6M
- Great explanation of inclusionary zoning and Professor Condon's ideas which prevent the bidding up of land. https://beyond.ubc.ca/how-controlling-land-prices-could-help-solve-the-housing-crisis/
- Banks need higher standards on the appraisals they give. Business loans are based on earnings. House loans could be based on the potential rent after costs. There is no way the appraisals can be justified on that basis.
- No loopholes for rent controls like vacancy exception.
- Housing speculation and flipping should not qualify for capital gains tax rates. Nor should selling commercial real estate second residences etc.