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Wednesday, February 17, 2010
The Maple Syrup Flavoured Bubble
Peter Foster on the Canada Mortgage and Housing Corporation:
In a free market, if banks felt a housing bubble building, they would simply tighten standards themselves, either by demanding higher credit qualifications, hoisting rates, or shortening amortization periods. Hoisting rates is out of the question, since rock bottom mortgage rates are now considered by the Bank of Canada to be essential to national economic recovery and protection of our export industries. That leaves Morrie Haz waiting there to insure mortgages, and gives the banks every incentive to hand out any loan that can get insurance. However, they obviously grasp that such cosmic policy fecklessness will ultimately come back to haunt them.
Just because we've avoided America's mistakes in housing policy, doesn't mean we can't make some of our own.
Posted by Richard Anderson on February 17, 2010 | Permalink
Unless either A) interest rates rise very fast very soon, or B) the gov't cracks down on the CMHC's insuring criteria, there will very likely be a housing bubble in Canada.
Posted by: Charles | 2010-02-17 7:41:01 AM
The government's attempt to ameliorate CMHC's mortgage risk is just another futile attempt to solve the problems created by one set of regulations by invoking further regulations.
The initial policy step in this story was an excessively easy monetary policy with absurdly low interest rates. This policy was designed to "boost" the economy, and now there is a belated recognition that this also caused too many Canadians to borrow for a house that is actually beyond their means to pay for.
Now Flaherty thinks he can tweak CMHC's mortgage rules to deflate the housing bubble without any negative consequences. That has never happened in the blighted history of central banking and it won't happen now.
Posted by: Dennis | 2010-02-17 9:38:28 AM
Left alone the market would do much better. I doubt a free market would have ever produced a bubble in the first place.
Posted by: TM | 2010-02-17 9:42:09 AM
I honestly don't see how the free market could produce bubbles because the increase in the money supply would have to come from savings - a pretty scarce resource.
Posted by: Charles | 2010-02-17 11:21:11 AM
You're exactly right. Flaherty won't do anything that will hurt the housing market. But that's precisely what needs to be done immediately. It's going to hurt a whole lot more later on I'm afraid ...
Posted by: Charles | 2010-02-17 11:22:39 AM
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