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Is CMHC to Blame for the Housing Market Problem in Canada?

26 September 2012

We’re not saying there’s currently a major problem with the housing market in Canada. We are saying that over the past couple of years, it’s become extremely overheated with just about every Canadian taking the leap (or at least desperately wanting to,) into the home ownership pool. And while there are probably a few factors that could take some blame for the sizzling hot market we’ve been seeing, one Canadian economists points towards CMHC as being at the root of it all.

Ben Rabidoux, one of Canada’s most respected researchers and economists, says that CMHC is simply a way to give a home to those that can’t afford it. And that it’s taxpayers that are paying the price.

“I don’t know that home ownership should be a right and that it should be backed by taxpayer dollars and kind of be the prime mandate of a Crown corporation,” he says.

Of course, CMHC was created after World War II in order to support Canada’s housing market. It was there so that when soldiers came home (often with bare hands and no job,) they at least had a place to live while they got back on their feet and became settled with their families once again. Now though, Rabidoux argues, CMHC doesn’t appear to be a helping hand but rather, a hand that’s leading us on our path to doom and collapse.

He says that CMHC has “absolutely been the key driver in the boom in the ownership rate in Canada.” He also says that this is hurting everybody. Not only by making taxpayers foot the bill, but also by driving people onto the market, which inflates house prices.

“They don’t provide affordable housing,” says Rabidoux. “They provide affordable home financing. And when all you do is provide affordable financing, you inflate house prices.”

But it might not be surprising that those at CMHC disagree with Mr. Rabidoux.

CEO of CMHC, Karen Kinsley, recently argued at the company’s annual meeting that the programs offered through CMHC “are essential components of Canada’s strong and well-functioning housing finance system.”

But are they really? If they’re so essential, why is Finance Minister Jim Flaherty seriously considering scrapping CMHC once they reach their insurance cap? He too has stated that the purpose of CMHC may now be somewhat misguided when you look at the original purpose of CMHC.

But as for all that money that taxpayers are supplying, so that unqualified borrowers can buy homes? Kinsley says that CMHC does its part too, contributing over $16 billion to the government through their own net income and taxes that they also must pay.

She also points out that the risk of default on those holding CMHC-back mortgages is historically low, and that their borrowers have the credit in place to back them up. She also points to the fact that CMHC maintains high reserve funds – more than twice what’s mandated by the Office of the Superintendent of Financial Institutions – just in case of default.

But Rabidoux goes on to say that while these are good arguments, they’re simply not enough. And that should CMHC continue to boost home ownership the way it has been, it does more than just take a bite out of taxpayers’ wallets.

He says, “What happens when you have a high home ownership rate is it reduces worker mobility and that’s a fairly well known phenomenon. So in my mind what’s going to end up happening is when this whole thing turns to normalcy, there’s going to be a period of readjustment in the economy where there’s going to be unfortunately high unemployment and persistently high unemployment. So there’s that danger as well.”

What do you think? Can CMHC be blamed for the housing problem, or the future unemployment problem because people now won’t be able to move for work as easily as they once did? Let us know what you think of it by commenting in the section below or Liking us on Facebook and joining the conversation over there!

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