Under Ken Whyte’s stewardship Maclean’s Magazine has enjoyed a return to relevance in recent years, but it has also earned its fair share of criticism for controversial cover and content choices. But while Whyte’s habit of poking and prodding our sacred cows – Quebec, for example – might make some people uncomfortable, it’s also led to some remarkably good and brave journalism. Last week’s article by Jason Kirby and Chris Sorensen on the role that the Canadian Mortgage and Housing Corporation may be playing in Canada’s inflated real estate market is a particularly good example of that kind of journalism.
The CMHC, after all, is not accustomed to being the subject of criticism, much less from a major Canadian publication. In fact, as Kirby and Soresen note in their piece, those that do speak out against the mortgage monolith often find themselves penalized for doing so. “Several other critics, including economists, realtors, lawyers and analysts contacted by Maclean’s, say they have also been the target of attack,” Kirby and Sorensen write. “One bank economist who once publicly raised fears about a housing bubble says he didn’t dare openly criticize the CMHC because of the agency’s reputation for snuffing out dissent—an allegation the CMHC denies. The economist spoke on the condition his name not be used.”
For a few years now, the idea that a housing correction was in the offing for Canadians was the sole purview of contrarians like Garth Turner. Canadians, the argument went, didn’t engage in the same risky lending practices that swamped the U.S. housing market with bad debt and even worse credit. Canadian bankers, politicians and homeowners alike became downright smug in the belief that “things were different” in Canada, and that a U.S.-style meltdown could never happen up here. Indeed, most of Canada’s major media outlets, print and otherwise, cheerfully perpetuated this argument. But in recent months there have been articles published in places like the Globe and Mail and now Maclean’s that put forward the idea that Canada’s housing market may not be as safe as it once seemed.
If a housing correction comes to Canada, we may well find ourselves blaming the CMHC in much the same way that Americans pointed the post-facto finger at Fannie Mae and Freddie Mac. Both the CMHC and Fannie and Freddie are – were, for the American pair – in the business of promoting home ownership, even when it didn’t necessarily make economic sense. And while CMHC representatives continue to insist that they’ve made prudent decisions designed to make home ownership a realistic – and reasonable – option for thousands of Canadians, it’s difficult not to wonder about the credibility of those assurances when you look at the numbers behind them. As Kirby and Sorensen note, “using the CMHC’s 2010 forecasts, it insures $519.1 billion in mortgages against $9.9 billion in equity, which works out to around 1.9 per cent (although the CMHC says it has another $6.7 billion in “unearned” premiums that could be used toward future claims). By comparison, in 2007, at the peak of the bubble, Fannie Mae backed up US$2.7 trillion of mortgage-backed securities with US$40 billion of capital, or 1.5 per cent equity against its overall exposure.”
CMHC representatives insist that the rate of repayment, the equity/debt ratio and low rate of mortgage arrears all demonstrate that Canadian homeowners are still safely swimming in the shallow end of the pool. But that’s sort of like assessing the safety of a car while it’s traveling at 25 km/h. The real test of the system’s solvency will take place at speed, when interest rates rise in order to accommodate the inflationary pressure that’s building in the Canadian economy. If inflation gets away from the Bank of Canada and rates spike into the double digits, we may find that the deep end is a lot closer than we’ve been conditioned to think.
More worrisome than the potential influence of interest-rate increases is the fact that there’s little to no oversight over either CMHC’s behaviour or its balance sheet. Kirby and Sorensen point to a note that C.D. Howe researcher Finn Poschmann put in a recent report, which observed that “Parliament and the voters to whom it answers have no formal documentation of the way these exposures are calculated or managed.” Given the scale of the assurances they’re issuing on our (the taxpayer’s) behalf, that’s information that shouldn’t be held on a need-to-know basis. Perhaps pieces like the one Maclean’s published well help loosen CMHC’s tongue just a little bit.
