Sabrina Maddeaux: The CMHC must be abolished before it craters Canada’s economy
The country’s total housing debt now tops $2 trillion, having recorded its fastest-ever monthly increase in April at a pace of $18 billion. Instead, it’s created a Caligula’s palace of moral hazard, fuelling the housing crisis via a mix of bad policy, bad data and the dangerous notion that taxpayers should underwrite private debts. It should be privatized or abolished before it craters the entire Canadian economy. The CMHC was created in 1946 to help Second World War soldiers access affordable mortgages.
This puts the government in a position where it needs the housing bubble to inflate indefinitely not only to rake in profits, but avert a disastrous scenario where it ends up on the hook for widespread mortgage defaults. It doesn’t take an economist to know that, unless Canada operates on some magical plane of the universe where housing crashes no longer exist, this will eventually end in tears. The reality is increased debt loads don’t equal increased affordability. At the same time, spending is redirected from more productive sectors of the economy to real estate.
Add government-backed mortgages to this equation and the result is a huge amount of liability for taxpayers and the country’s financial future as a whole. In January 2020, the International Monetary Fund issued a report on Canada’s housing finance system. They wrote, «By seeking to achieve housing market stability via transferring credit risk to the government, the use of portfolio insurance during a crisis may increase moral hazard and expose the taxpayer to losses». Note this IMF report was issued pre-pandemic, before home prices leapt by as much as 40 per cent in some locales.
The Canadian government was warned about an impending housing crisis and refused to stop it. In March 2020, when COVID hit Canada in earnest, the CMHC expanded its insured mortgage program to $50 billion, then $150 billion, fearing the housing market would topple. The Bank of Canada then poured gasoline on the flames with Quantitative Easing and low interest rates. In May 2020, CMHC released a flawed market forecast that predicted home prices would decline, perhaps significantly, which further supported both moves.
It was a dead wrong prediction the organization refused to update for months even as the housing market went, to use a technical term, cuckoo bananas. The feds and Bank of Canada throwing fuel on an already overheated market was an unforgivable act of government overreach that will have devastating consequences for decades to come. The Bank of International Settlements , a global institution owned by 62 central banks, warns that household debt loads above 80 per cent of a nation’s GDP are bad for an economy. In Q4 2020, Canada’s household debt was 112.6 per cent of its GDP.
Our property prices are so out of whack with incomes, BIS considers us at risk of a banking crisis. Meanwhile, the CMHC increasingly sees itself as a social justice warrior that champions the little guy. This is, of course, ludicrous coming from an organization that backstops wealthy banks with the tax dollars of average Canadians. The CMHC says it wants to combat systemic racism, but enacts policies that protect generational fortunes, diminish class mobility and exacerbate wealth divides that often fall along racial lines.
It wants to rebrand to highlight its supposed focus on housing affordability, yet it continues to push ownership, and even adequate rentals, further out of reach for everyone but the richest Canadians. If the housing crisis were a story of David and Goliath, the CMHC would be shining Goliath’s shoes with David’s rags, leaving him naked on the battlefield. At best, the organization is a textbook example of the deleterious effects of government intervention in the economy.
Source: Sabrina Maddeaux | NP