Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Inflation has been performing under the normal level for a long time. Bank of Canada with their so called monetary stimulus failed to revive inflation to a healthy level. Beside weak inflation, strong housing is another serious threat to our economy – if it is in a bubblized state.

International Monetary Fund (IMF) thinks that the Canadian government is exposing itself to higher risks by insuring high ratio mortgages. High household debt will play as a catalyst if there is a serious rate hike threat – to raise mortgage default rate.

Although Canadian housing is not as bad as US but it is still susceptible to sudden shock. The shock can come from many fronts. It could be interest rate or a price drop or jump in inflation or all of them.

Now closing the CMHC’s store is a big issue and experts will keep arguing for ever. So far CMHC’s existence has been nothing but beneficial for the Canadian taxpayers. It makes money and it goes into our pockets.

To be very practical – CMHC insures the banks against borrowers default. Even if there is no insurance backed by any default insurers – the lenders will create ways to lend money and the government will find ways to help voters. There is a reason the B lenders exists in the market.

Even without CMHC if any of the big banks to fail – taxpayers have to eventually bail them out. So getting rid of CMHC will only hurt Canadian taxpayers and no one else. Pointing figures at CMHC as a scapegoat is one of the many favourite quotes of may economists.

Everyone require a shelter. CMHC only helps to access that. It is not responsible for hot housing market or low interest rates.

RBC today came out with its housing affordability report – it says that the trend is still eroding. The report rang the cliché alarm by stating that raising rates may hurt the market and the borrowers.

While we all understand the risk from a jack rabbit rate but we borrowers do not see any imminent danger from it. Many experts are predicting that if there is any rate hike then it will be in 2015. So, for now we are okay to borrow. Till we feel the heat and it becomes unbearable we will just live with the probable threat – we are actually used to with it.

Canadian five years bond yield 10 years chart Nov 13

In last ten years – Bank of Canada Benchmark five years bond yield had a highest rate of 4.72% and the lowest was 1.06%. 3.72% change in ten years. It may be a shock for many borrowers but not enough to shake the foundation of Canadian homeowners.

The real threat is hiding in the weakening Canadian dollars. So far we have avoided a serious inflation because our currency was strong and we had more buying power. Now with the renewed talk about a global depression – energy prices are dropping and that will pull our currency along with it. We shall lose our buying power and inflation will rise.

In all these problem Bank of Canada will face a very fundamental issue. If all it is going to do – is to keep the rate at 1% then how it will tackle the future threat? It has nothing but bonds and overnight rate in its arsenal to fight with the financial uncertainty. Sooner it realizes – that this battle is not only their own but should be a coordinated one between all the stakeholders – is better for all of us.

Our country is in the right track so far. OSFI, government, CMHC, BoC are all acting together with one single goal. They are not very clear about the foe but the expectation is that it will become clear over time.

As on today we can safely conclude that CMHC is here to stay. IMF should pay more attention to find solution to global shelter problem – not to poke an existing one.

Please let us know what you think.