By now, many of you have heard that, in addition to stress testing insurable mortgages, the government now intend for lenders to similarly stress test non insurable ( what we previously called ‘conventional’ ) mortgage financing, in a bid to better manage risk in the Canadian housing market.
By way of an example, imagine you are a couple who, by dint of hard work, luck and the bank of mum and dad, have amassed a down payment of $600,000.
By some miracle, you’ve located and purchased the very last liveable 3 bedroom semi in East Vancouver for 1.2 million dollars.
Today, given your excellent credit rating and your $85000 a year income, you can qualify for the $600,000 in additional financing needed. Its squeaky, but you’ve demonstrated your ability to pay larger amounts over the years – it’s very “approvable”.
Spool down the road a couple of months however and because the government wants to better manage risk and affordability, you no longer qualify for the financing required. In fact, your purchase cap is now 1,100,000, in a market where prices will likely escalate 2 % in those intervening days.
So who does this extra protection serve? Not our buyers, not our lenders, not even our market place.
Without a concerted effort on the part of the government to actually manage affordability, the changes are meaningless.
Several countries get rolled out as examples of thriving free market economies with stable housing markets; 2 often cited are Austria and Germany. How do they do it?
Well, the key is an entrenched, robust social housing programme. Austria, for example, provides low cost financing to low or no profit developers who in turn partner with the government to build social housing. The ‘developers’ are often community based institutions. One example cited of a common “developer” is a trade union. Bonuses are paid to the developers in order to maintain quality standards, meaning that the build quality cannot be differentiated from commercial developments.
Having recognized that successful social housing means having people from all walks of economic life actually living together rather than in silo complexes in the same neighbourhood, the maximum income threshold is actually quite high. If you are a high income earner, you are just as eligible as a medium or low income earner.
Because the programmes are so robust, market demand for owned real estate is balanced and actually stable.
Last night, I had a two hour conversation with a friend who expressed nothing but frustration about the whole situation here in Vancouver.
From that sense of frustration, I’ll pass on this key message; CMHC, get off your cash swollen backside and get back to work, fulfill your original mandate.
For those of you who have gotten this far and are now rolling your eyes about the whole “social housing thing” it need not be in the same style or format as the European models, but let me make three final points;
1. The only way to increase affordability is to increase supply and thereby reduce purchaser competition. Nothing is currently being accomplished by providing incentives to the commercial housing market. The only way to increase supply is by throwing full support behind the development of social housing.
2. There’s 4 BILLION dollars in profit going back to the federal government from CMHC, that should by rights, be used to fund such an initiative. Even the most conservative of you will agree that “profit”from a Crown Corporation is actually just taxation.
3. There is already precedent for such a scheme. I’d invite you to have a look at Ajax, Ontario. What was then known as Central Mortgage and Housing Corp. managed the development of Ajax. The project was meant to house returning WW2 vets and it was handled by CMHC right up until the town was incorporated. It worked, as far as I can tell, but you’d probably like to check with the townsfolk.
Anyway, end of rant.
Thanks for reading If you’ve gotten this far.