Our Finance Minister Jim Flaherty last week said that he’s done enough to control the housing market and avoid a meltdown like the ones in Spain, the US and Ireland. Apparently, the housing market has cooled quite abruptly since July – everything is under control. To cool the market, Flaherty didn’t raise interest rates. Instead, he made it harder to get a mortgage. He did this mostly through tampering with the Canada Mortgage and Housing Corporation (CMHC). Now that his manipulations of the housing market are over he’s going after the bogyman responsible for causing it all – the CMHC. Flaherty would like to privatize the Canada Mortgage and Housing Corporation. Its time has come. Its mandate is outdated.
What is the Canada Mortgage and Housing Corporation?
The Canada Mortgage and Housing Corporation was created in 1946 to help soldiers returning from war. It stimulated the economy shifting from war factories to domestic demand and it ensured more importantly that returning soldiers could afford a home and get on with life.
Once the veterans were settle into domestic life, the CMHC backed low-rent housing developments and aided any qualified homebuyers who could not come up with the 25% downpayment by guaranteeing their mortgages. It was supported by banks, the government and the general population.
That was fine. But then the Canadian economy matured. The mortgage lending business changed and over time the CMHC was lending money to everyone. If you could get a forty-year mortgage with 5% down and with average home prices rising, how could you go wrong? Everyone could take advantage of easy credit. It was easy money combined with low interest rates and because of this the price of real estate doubled in about a decade (a little more). A program that was started to make housing more affordable ended up making housing unaffordable.
Our Kitchener Waterloo real estate market is balanced now. Prices are still rising, but sales volume is down considerably over the past couple of months. It seems at this time that Flaherty’s tinkering has brought us in for a soft landing. Changing the CMHC, although will impact first-time homebuyers, will lead to a more stable housing market.