Contributing editor Mark Bourrie looks at our precarious economic situation — and the likely consequences for taxpayers if interest rates go up anytime soon
The death of the penny, the cuts to the public service, and the declawing of environmental assessment commissions made the headlines when Jim Flaherty brought down his budget, but people are ignoring a little bomb that could blow down the whole house of cards.
All of Flaherty’s — and Ontario treasurer Dwight Duncan’s — financial forecasts are based on interest rates remaining abnormally low.
But if they don’t, we’ll see a big jump in interest rates on our national debt. And we may see the housing bubble burst, with serious consequences to the entire economy — and to public finances.
Canada Mortgage and Housing (CMHC), which backstops 75% of the country’s mortgages, is now close to its $600 billion debt ceiling. That’s more than the entire national debt.
CMHC provides insurance for mortgages. It does not protect the homeowner; it protects the banks. So if we have the kind of real estate meltdown we’ve seen in the U.S., the U.K., Ireland, and much of Europe, the Canadian government will be on the hook for billions.
Two days before the budget came out, a survey by Leger Marketing, done for BMO, found that 43% of Canadians are not sure they could afford their homes if their mortgage rate went up by as little as two percentage points.
The survey was taken before BMO, Royal, TD, and National banks announced their five-year posted rates will go up to 5.44 percent — an increase of nearly 2.5 percentage points from the sale price offered in a price war that began in February.
“At first when you look at this you think ‘oh my goodness that’s pretty scary,’ ” Laura Parsons, a mortgage expert at BMO, told a reporter.
“Oh my goodness” indeed.
The same day that survey came out, the superintendent of financial institutions pleaded with lenders to toughen their rules on condo lending. The banks and other lenders have been offering “cash backs” on mortgage loans, effectively allowing people to borrow almost 100% of the cost of their homes.
Since most of these loans are insured by CMHC, the banks and home-hungry buyers and speculators are effectively gambling that rates will stay low and prices will rise. Home buyers carry some of the risk, but it’s really taxpayers, through CMHC, who would end up holding the bag if prices fall or rates rise.
In Vancouver, house prices have started to fall, although they are still ridiculously high. A wave of foreclosures has hit the retirement communities in the Okanagan. Toronto, where there’s still a forest of construction cranes along the waterfront, through the old garment district and up into Parkdale, is showing signs of condo fatigue.
Condo buyers — many of them speculators who own several units and “flippers” who buy before a building is finished and sell for a profit a few months later — aren’t getting much sympathy in Ottawa. The over-heated real estate sector rates far, far less attention than the Alberta oil industry.
“I’d like the market to correct itself,” Flaherty told reporters last week. “We’re seeing some evidence of that in the condo market, particularly in Toronto, where there is some softening of the market. And that’s a good thing.”
On budget day, Toronto Dominion chief executive officer Ed Clark, speaking at the bank’s annual meeting in New York, said he hoped the feds would rein in CHMC. Clark said the Canadian housing market needed a soft landing. Banks were already doing their part by ending the winter’s 2.9% mortgage sale.
It didn’t happen. Flaherty promised “better governance” for CMHC, but nothing specific.
If we see the kind of correction that hit the US market, where houses in many major cities lost 40% or more of their value and foreclosures became very common, the impact on the economy and public finances would throw the forecasts of the federal and Ontario budgets out the window.
Consumer demand would slump, tax revenues would crash, and the government would assume billions in CHMC debt.
But that kind of talk does not sit well in a “feel good” budget. So instead of helping slowly deflate the bubble, our finance ministers would rather pretend there will be seats for everyone when the music stops.