Tuesday, May 01, 2012

What's going in Canada: The Retreat of Housing’s Greatest Ally

If you have an interest in Canadian residential real estate, you’ll want to understand what happened on Friday.

In a series of interviews, Finance Minister Jim Flaherty stunned us all by alluding to far-reaching changes to the foundation of Canada’s housing market.

For 58 years, the government has offered mortgage default insurance to qualified Canadians. The idea has been to make homeownership more accessible, which in turn bolsters the broader economy.

Now, the government’s direct support of that insurance is in question and there are potential implications for home prices, mortgage availability and mortgage rates.

The comment that lit up headlines Friday was this one from Flaherty:

Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.” (Source: Financial Post)

It’s hard to know exactly what outcomes Flaherty has in mind. What is clear, however, is the Canadian government’s about-face on policies that have created one of the strongest housing markets in the world.

Those policies, in part, have fuelled home values and boosted exposure to default insurance. But they’ve also saved housing from imploding during the worst financial crisis in generations.

Going Private

With his comments Friday, Flaherty has put the government’s support of housing finance in doubt. That is despite describing housing risk as “moderate” and saying that it is "not a system that requires change right now."

This presumably means that private enterprise will eventually assume much more of the housing and insurance risk borne by the government. One can envision a sale of Canada Mortgage and Housing Corporation (CMHC), a reduction in the federal guarantee of mortgage insurance, limits on conventional mortgage insurance, or some combination or equivalent.

In many ways, this is seemingly healthy. For example, one may wonder why a lender has to insure a mortgage against default when the borrower has 20% equity. Other things being equal, that borrower is significantly less likely to stiff their lender than someone with, say, only 5% down.

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