Monday, July 17, 2006

Housing matters returned

I'll return to the subject of my earlier post on the CMHC's new program which allows homeowners to have an interest-only mortgage insured with no down payment.
Today the Globe and Mail ran a good editorial on the CMHC's decision and what it means for the economy. The article follows the sentiment I expressed earlier, but the author's recommendation is blunt: "Such mortgages are risky for the buyers and their backers. The agency should get out now -- before the going gets tough -- and leave the Don't-Pay-a-Cent events to the private sector. "

Here is an excerpt:

Bank of Canada Governor David Dodge personally chastised CMHC officials for their folly last week. As Mr. Dodge told a news conference before his private meeting, insuring interest-only mortgages could actually drive up housing prices, fuelling inflation. "We'll have to see, but if we look elsewhere in the world where there has been a major move to interest-only mortgages or other innovations of that sort, that has had an influence on housing prices," he warned. That would work against CMHC's avowed purpose of ensuring that home ownership is more affordable and accessible.
CMHC announced the scheme with little fanfare in late June. As it explained, it now insures interest-only mortgages for borrowers "with a proven history of managing their credit." It provides the example of young people "who may prefer more cash-flow flexibility with some of the upfront, one-time expenses associated with the purchase of their first home." In the real world, that is called Storing Up Trouble, because after the 10-year grace period those buyers will eventually have to pay off the principal, too. And that means higher monthly payments.
Canadians are already out on a credit limb. Although their assets considerably outweigh their liabilities, in the last quarter of 2005 individual Canadians and unincorporated businesses owed a stagger-ing $992-billion, including $597-billion in mortgage loans and $265-billion in consumer credit. That amount was 5.6 per cent higher than third-quarter debt. In other words, we have been on a spending spree. There are signs, however, that we are coming back down to earth. Statistics Canada has calculated that the savings rate was 1.9 per cent of personal disposable income in the first quarter of this year. Canadians are no longer dipping into their savings. The red-hot housing market, with the key exception of Alberta, is slowing down; the average number of housing starts in the second quarter dipped 9 per cent below the first quarter. With the Bank of Canada's key policy rate at 4.25 per cent, housing prices are no longer skyrocketing.
Life is relatively stable. So why has CMHC abruptly decided to insure the riskiest mortgages, backed with Ottawa's clout?

The link to the article is here.

1 comment:

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