The former head of the Bank of Canada has jumped into the debate over the housing market, warning that prices have reached a point where they are almost unsustainable.
“One would have to say that the relation of house prices to Canadians’ income is right at the high end of what one would think would likely be sustainable over time,” David Dodge told Business News Network on Wednesday.
Mr. Dodge, the central bank chief from 2001 to 2008, said the remedy is not necessarily higher interest rates. Rather, the Canada Mortgage and Housing Corp. should start scrutinizing more closely the kind of mortgages that it insures.
“That’s not to say the Bank [of Canada] ought to somehow raise interest rates really quickly, but it does say that [CMHC] should be very careful about the terms and conditions on which they are giving mortgage insurance,” he said.
As part of Ottawa’s policy to encourage home ownership among Canadians, the CMHC provides insurance for higher-risk home buyers such as those who are unable to make a 20% down payment, enabling people who would not otherwise be able to get a mortgage to enter the market.
The CMHC also guarantees billions of dollars of mortgages that are converted into Canada mortgage bonds and sold to investors.
Mr. Dodge said we’re “getting to a stage where one begins to get quite nervous” about the ability of some consumers to pay off their mortgages if rates rise. He notes that it is “clearly appropriate” to have very low interest rates because of the economic recovery and where rates stand in the rest of the world. He said that is why it’s more relevant to look at the “terms and conditions” of mortgages to deal with this issue.
The comments come less than a week after Jim Flaherty, the finance minister, said there is no compelling evidence of a housing bubble in Canada.
With residential real estate prices across the country close to record highs, many observers have expressed concern about the state of the market particularly with the run up that took place in the months since the financial crisis.
The concern is that when interest rates rise starting later this year many Canadians could find themselves struggling to make their payments. And if the economy reverses course at the same time – as some economists predict – the situation would be exacerbated, with serious negative implications for the housing market.
Moody’s warned last month that expanding consumer debt levels could leave Canada in a worse position than the United States in the next few years if current trends continue.
“We believe the housing market is the principal driver of this expansion,” said the report by Peter Routledge, senior vice president at the rating agency. “We have the uneasy sense that we have seen this movie before…. As witnessed in the United States, this movie does not end well.”
Many blame the meltdown south of the border on the availability of cheap credit even to people with no chance of meeting their obligations.
While nothing in Canada compares with the subprime market in the United States, experts say that the CMHC mortgage insurance program enables lenders to offer cheaper mortgages than they could otherwise to a wider range of borrowers.
At the same time, the CMHC’s mortgage bond progra – the underlying loans are also guaranteed by the agency – creates incentive for banks and other lenders to sell more mortgages by providing access to hundreds of billions of dollars of cheap funding.
The basic idea of making it easier for people to buy homes was a noble one but instead the Crown corporation’s programs have had the opposite effect of making houses less affordable.
And at the end of the day taxpayers are left holding the risk because CMHC mortgage insurance is effectively guaranteed by the federal government.
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Moishe Alexander points to Bob Dugan’s remarks. “Housing starts decreased in both the singles and the multiples segments in May,” said Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre. “The decrease in housing starts in May is consistent with our forecast that housing starts for 2010 will reach 182,000 units.”