The mortgage monster
The Canada Mortgage and Housing Corp. was created in 1946 with the best of intentions. Soldiers were returning after liberating Europe from Hitler's grip; a grateful nation wanted to ensure they could afford their own four walls. The Crown corporation's job was to see that they got it.
Once the veterans settled into civilian life, CMHC turned its attention to other things. It backed low-rent public housing developments like Toronto's Regent Park and helped redevelop Granville Island in Vancouver. It also aided homebuyers who didn't have a 25% (now 20%) down payment by guaranteeing their mortgages - coaxing the banks into lending them money. That mortgage insurance business started in 1954, and for most of the next half-century CMHC lived a placid existence.
Then one day the government woke up and realized that what was once the Veterans' Housing Shoppe was now backing the mortgages of anyone, for nearly anything. Five per cent down? No problem. Forty-year mortgages, investment properties and highly leveraged $2-million mansions by the water? Yes, yes and yes. Bring 'em on. The lax standards, combined with low interest rates, opened the way for easy money to flow. Average home prices in Canada have doubled over the past decade. A federal institution whose mission was to make houses more affordable has managed to do the opposite - make them unaffordable.
How did that happen? Governments, Liberal and Conservative, were blind to the First Law of political intervention in housing markets: Anything you do to help homebuyers will eventually go too far - and merely help home sellers win the lottery. The Harper government, after watching home prices jump 50% during its time in office, is now frantically trying to shove the CMHC monster back into its cage. Good luck. The feds' latest moves - banning the corporation from insuring 30-year loans (after previously nixing 40- and 35-year mortgages) and those used to pay for million-dollar-plus homes - are already being blamed for a sharp decline in housing sales in Greater Vancouver.
No country fetishizes home ownership more than the United States, and no country provides a better illustration of the First Law at work. The Great Depression, not the return of war veterans, spawned Fannie Mae. But its mandate was similar to CMHC's: to grease the financial wheels of home ownership. Fannie and its younger cousin, Freddie Mac, soon became political instruments that backed the mortgages of thousands of people who had no ability to pay over the long term. This, combined with other factors, including greed, caused Fannie and Freddie to collapse during the financial crisis of 2008.
Behind every housing bubble is a financial institution - or several - promoting the rapid expansion of credit. And behind those financial institutions, usually, are politicians demanding that the loans keep flowing, or turning a blind eye to what's going on. Here's Bertie Ahern, prime minister of Ireland, in 2006, dismissing concerns about construction-fuelled inflation: "In actual fact, the reason it's on the rise is because probably the boom times are getting even more boomer." Two years later, something did indeed go "boom." Stuck with tens of billions of dollars in bad loans to property developers, that country's banking sector went bust. Ahern had to admit the Irish banking regulation had been abominable.
In Spain, political meddling also has a place in the story of a housing bubble. Like the Americans, the Spanish allow home-owners to deduct mortgage interest for income-tax purposes. Like American politicians, Spanish politicians prefer to ignore the fact that the deduction is easy to calculate and therefore can be quickly factored into the price of a home - i.e., the benefit flows to the home seller.
The real estate market is like that. It's annoyingly efficient. But that's the point. All of these government initiatives in Canada, the United States, Ireland and Spain had the same objective: to expand the pool of people who can buy a home.
But who gains? Not the first-time homebuyer, who merely faces more competition for a house. The real estate market is even more susceptible than the stock market to being flooded with marginal buyers who shouldn't be there. Owning your own place has an undeniable psychological appeal, even when the numbers don't add up. Most people don't need more encouragement from their politicians.
The U.S., Ireland and Spain are dealing with the terrible fallout of housing bubbles that burst. Canada, so far, is not. The best-case scenario is that we'll avoid their fate and learn valuable lessons about taking the cult of home ownership too far. Close to 70% of Canadians own a house, up from 60% in 1971. That's impressive. But Ottawa's job is to ensure a safe banking system, fairness and reasonable access to loans - period. It's not to push that number even higher. The risks of doing so are too great. Ask the Americans, the Irish or the Spanish.
Derek DeCloet is editor of The Globe and Mail's Report on Business section. He can be reached at firstname.lastname@example.org