By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans. And although the government has tightened lending standards recently and may do so again in the near future, a report from the Reason Foundation in the U.S. found that government guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Government simply cannot price risk accurately; while private lenders, if unencumbered by market-distorting policies, have every incentive to price risk appropriately.AM: The comparison with the U.S. is apt, in these respects: Low interest rates, and a government sponsered entity that has offset the risk faced by commercial lenders and investers. On the other hand, we don't have the same "too big to fail" history; non-recourse loans are rare... would a housing bubble collapse have the same effects in Canada?
Monday, April 23, 2012
Canadian Housing Bubble
Smart post from Jesse Klein on the Canadian Housing Market:
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We need housing prices to come back to normal, especially in Ottawa, they are way overvalued. This may not happen as people predict because interest rates will remain low and people will continue to be able to finance their mortgage and/or simply add more to their debt.
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