Canada's Housing Bubble

Jan 16, 2010 Gerald Flood winnipegfreepress.com

Every bubble bursts. When they are soap bubbles, they are harmless bursts. When they are economic bubbles, they are ca­lamities,  and they have  been for centuries.

Take the prettiest -- image-wise -- burst bubble, the Dutch tulip bubble. It burst almost three centuries ago.

It began humbly enough in 1593 when a botanist brought some tulip bulbs back to Holland from what is now Turkey.

He planted them as botanists will do but thieves made off with some of them and started cultivating and selling them. Being rare flowers (they were not native to Holland back then) they became much in demand, so much so that they were traded like gold, their value in present-day dollars about $1,200 a bulb, according to Cynthia Wood at damninteresting.com.

From a few purloined bulbs, tens of thousands of the things were created. They became so sought after that people stopped planting the rarest ones and instead kept them under lock and key.

Wood notes that on one occasion a single bulb was traded for, among other things, a bed, a complete suit of clothes, and 1,000 pounds of cheese.

And then, just like that in 1636, the bloom came off the bulb and everyone woke up, as it were, to the fact that they were just dirt-encrusted tubors that produced bright but short-lived flowers.

But it wasn't all bad news -- tulips today are ubiquitous, especially in Holland.

It's easy from here to look back and find it all very quaint. But fortunes were lost then and for the same reason that the U.S. housing bubble two years ago almost brought the world economy to its knees -- too many buyers chasing a dream built on little more than faith in rising prices, leverage and greed.

Canada, of course, did not escape the collapse and the country has gone deeply into deficit -- money that we will all have to pay back.

But Canadian homeowners have fared reasonably well. To be sure, thousands of Canadians have lost their homes but that's mostly due to losing their jobs and incomes.

Millions in the United States are homeless as a result of the subprime mortgage debacle, which had the effect of vastly inflating both the seeming buying power of consumers and seeming value of houses.

In short, Americans were getting credit at rates so low that they could buy way more house than they could afford if credit charges increased, which they did.

We don't have a subprime problem here, so we won't have a real-estate bubble, we are told.

In fact, just this week, Bank of Canada officials were assuring everyone that steep increases in house prices are the "natural" consequence of pent up demand during the recent trough, which also had the effect of suppressing prices so that surging prices now appear to be surging faster than they are.

Now, I'm no expert and I'm inclined to believe what the experts tell me.

But I also hear opinions of people in the property racket who aren't so sure. And their concern is not so much that Winnipeg house prices have climbed 78 per cent in the past four years, as the new reassessment reveals. Or that there are stories about house hunters sleeping in the streets of Vancouver in hopes of snapping up a $1-million house that we would pay no more than $350,000 for.

No, their concern is that low interest rates and long-term amortization periods are making it easy to get into the market -- maybe too easy. But more concerning is that all this demand is being insured by the Canadian Mortgage and Housing Corp.

CMHC is a good Canadian idea. It insures mortgages for persons who have less than a 20 per cent down payment. Insurance, in such circumstances, is required by law.

As the financial crisis started to hit in 2008, the federal government increased the ceiling of mortgage insurance CMHC can have outstanding -- from $350 billion to $450 billion, and then $600 billion.

The move is widely regarded as a key measure that helped prevent the kind of credit crunch that so hurt the United States. And just about everyone who has commented on the changes, including Liberal finance critic and former bank president John McCallum, are cool with that.

But my sources wonder if CMHC, which insured 920,000 housing units in 2008, 350,000 more than it intended, according to the Globe and Mail, was in a position to ramp up its due diligence as fast as it ramped up its underwriting.

It's a good question because, if there is a bubble, Canadian taxpayers will be on the hook for all the paper.

I'm not trying to be alarmist here. I simply think it prudent that we start hearing more than "trust me" from the folks in charge of the tulip patch.