cdr108
Senior Member
this was in the comments section of the article, and imo the explanation given is exactly what happened:
Master of my domain
7/15/2010 10:17:35 AM
This was expected. Not because of the economy, low interest rates or anything else that is spouted. It is all about availability of credit, especially to buyers of multiple properties.
Look at past housing booms and busts. Pent up demand will only take you so far.
We are bombarded with the number of real estate millionaires. We see programs like flip that house and hear infomercials. Give many a chance, and they will try the same thing.
In the late 80's, many did the same thing. As banks lent on value, and valuations were aggressive, you were able to use CMHC and a line of credit based on the non-funded portion of equity to buy a house no money down. Many did cosmetic work and then sold at a profit; the unfortunate part being that most of the gain was due to rising value and not the work done.
The banks reverted to lending on cash flow at the end of 1989. What ensued was a sharp drop in volume and an ultimate crash that took Central Guarantee and many trust companies (including Confed).
People got scared and stayed away from real estate until 1996 when true pent up demand hit. This probably lasted until 2003. To continue the market, exotic mortgages came into play (0 down interest only, prime minus mortgages, etc.) Then, ABCP and other financing products created demand for mortgages causing looser standards. This again increased demand.
Ultimately, the US players started to withdraw in 2007 when their home market collapsed. As credit availability dried up, so did demand. Thus, in late 2008, the market dried up.
Into this came CMHC. They increased the amount they could guarantee, they loosened lending standards and the party started up again.
When CMHC’s 2009 results were announced, their higher than expected loan loss provisions due to an Alberta market that had not recovered caused them to break even. This must have woken up a few people because coincidentally, at the same time, lending standards tightened. Their targets were the same people that drove up demand, people who buy multiple properties with no money down and little cash flow to support the mortgage if things turn down.
Now we multiple problems.
The market - with the artificial demand created by CMHC in the last few years gone, demand will fall. As demand falls, prices will also start to fall.
With lending standards tightened and lower prices, refinancing will not be possible. So, you get the problem, lack of credit during lowered demand and a falling market. This then starts to spiral. Because CMHC propped it up for an additional 2 years, we have more height from which to fall which usually causes the market to overshoot on the way down. Given the projections for economic and job recovery, interest rates, etc., there does not appear to be something that will change this.
CMHC – their business became a Ponzi scheme in the last 2 years. When they continue with standard business practices, things chug along smoothly. When you seek more and more profits at the tail end of a bull market, problems arise.
CMHC was aggressively pursuing growth since 2008, just as the cycle was ending. The magnitude of their involvement ( /> $100 billion) caused the market to restart. Unfortunately, they do not have the equity to support this (it was built up when they were a much smaller market player) and accounts for less than 2% of their guarantees. It is insufficient if the market drops only 10%.
This is occurring during a time of emergency rates that have existed for 2 years and are having problems continuing. As prices fall, taxes and other costs rise, rates creep upwards and standards change, many people will no longer qualify for mortgages at renewal causing more product during falling demand and falling prices.
CMHC has the capacity to re-inflate the market, but at a great risk to the taxpayer. If you ask the government, they claim that this issue is a business decisions and they do not interfere in business decisions. However, since permission for doubling the amount of guarantees was given, since when is oversight on risk not their job?
Write to CMHC and they will say this is normal business practises. This is the same thing everyone said in the US in 2008 and in Canada in 1990. - flawed risk models were only recognized in hindsight.
Market – without CMHC, the market will find its own equilibrium. Unfortunately, this is well below its current level. It was on its way to that in 2008 before CMHC intervened. Unfortunately, as it was artificially inflated in 2009, it will have that much more to adjust and the more adjustment required, the more markets tend to overshoot the equilibrium.