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What is CMHC?
CMHC, or the Canadian Mortgage and Housing Corporation is a Crown Corporation created shortly after world war two to assist returning vets to purchase homes. This was initially needed as banks were reluctant to lend to returning vets and government (taxpayer) insurance was needed to entice banks to issue these mortgages.
In this way CMHC insures certain mortgages, thereby indemnifying the banks from loss in the case of default. This program was initially well-founded and justified as it provided the banks with the peace of mind required to lend, and it allowed many returning veterans the peace that comes through homeownership.
As time went on, CMHC expanded their program from vets to the greater population expanding its mortgage insurance to all Canadians looking to buy their first home. Now initially that was the catch, the insurance was available to people looking to buy their first, starter, home and this had many conditions attached to it, maximum price, couldn't have owned a home in Canada in the last X many years, etc. etc. At this point, the program was a helpful tool to assist first-time homebuyers in getting into the market and becoming homeowners with as little as a 5% downpayment.
Time continued to progress, and CMHC continued to expand their program. The expanded program now allowed for the purchase of any residential property with as little as 5% down, Vacation properties, Rental properties, or just speculative purchases could be financed with as little as 5% down. Further, the max price cap was removed, so now all of Canada's residential inventory was able to be purchased for a minimum of 5% down, for a brief stint pre-2009 one could even purchase with 0% down while receiving a cash kickback from the bank.
The problem with all this is hopefully clear. Individuals with the means can speculate, or purchase additional properties with very little "skin in the game", banks are happy to lend this money because they are indemnified from loss, so the money keeps rolling out to buy more and more houses while the taxpayer keeps backing the risk.
Fast forward to 2018 and the government introduces further legislation giving the government an equity stake in new purchases. which gives the government further interest in ensuring that real estate prices never come down.
In this sense, it seems clear the CMHC is part of the problem of our current housing crisis. I say "part of" because the supply side is arguably just as big, if not a bigger problem. But despite CMHC's role - Is abolishing the CMHC really going to be beneficial?
I would argue that abolishing the CMHC would cause more harm than good. If abolished, we have two scenarios that begin to appear.
(A) we have a period with no mortgage insurance, where we revert to standard mortgages requiring a minimum of a 20% downpayment in order to be financed. In this case, the only individuals who would be able to buy, or re-purchase within this market are those who already have the means. This would create increasing distributional problems with inequality, at a time when we are all painfully aware of the inequality present in society around us.
(B) Private insurers step into the space vacated by CMHC and begin to offer a similar service to that which CMHC had offered.
Under scenario (B) if these private insurers mirror the offerings of CMHC, we end up with the same scenario as we have now, but at least with the benefit that the taxpayer is no longer backing the risk in the case of a crash. That is, we still have the undue surge in demand by allowing banks to allocate capital to the real estate market through risk-free loans, which to be honest creates an interesting distortion in financial markets, but that is for a different conversation.
In this case, I am not in favour of abolishing the CMHC, no insurance would create lots of problems while having private insurers step in would only help in the sense that it takes the risk off of the tax-payer and onto private enterprise (assuming no eventual bailouts).
I would call, not for an abolishment of the CMHC, but a return of the CMHC to its earlier mandates. In assisting Canadians with their first home purchase up to a regional price cap. In my mind, there is no reason why the government should be providing financial assistance to those who want to speculate in the housing market. there is no reason why the government should be providing financial assistance to those wanting to purchase a vacation cabin or a rental income property. In my mind the program should exist to aid Canadians in achieving homeownership, not to aid Canadians in making money off of the real estate market.
Thoughts? feel free to comment below.
