The good news that isn’t

Just a few more sleeps until two of the biggest financing changes in decades arrive. Yes, kiddos, your chance is coming to owe a lot more debt and cough up excessive interest to own a wildly inflated asset.

Two things. First, loans can be financed over 30 years, instead of 25. That starts in mid-December. To qualify you must (a) be a first-time buyers and, (b) be gullible. Alternatively, simple financial illiteracy will do. Just don’t try to understand amortization and you’ll be fine.

(For the rest of us, a $700,000 loan with a 25-year am costs $4,100 a month at 5%. Amortized over 30 years, the payment drops to $3,775. The savings: $325 a month or $19,500 over five years. But that costs $2,700 more in interest and after sixty payments you owe $22,700 more. Bank, 1. You, 0.)

The second change CMHC is making is even more profound and, lawyer Mark Morris says, more deceptive. It looks like good news. It isn’t.

The crown corp is upping the maximum price for a home it will insure to $1.5 million. That’s a massive half-million-dollar increase, and twice what the Libs had previously promised. The logic is that this allows ‘greater affordability’ because, well, that’s what houses cost.

The biggest impact of getting mortgage insurance (which you have to buy, of course) is a lower downpayment requirement. Just 5% on the first $500,000 and ten per cent on the balance. So previously any house north of a million took 20% down. Now, way less. Purchase a $1.45 million pile with cash of $120,000 instead of $290,000, as before. The good news is a 59% drop in the downpayment. The bad news is $170,000 more debt. The even worse news, says Morris, is that the government agency is playing a key role in ensuring real estate values stay stupidly high, disenfranchising most young couples.

“CMHC has seen its role reversed from the great enabler of home ownership to the source of pain for most Canadians whose housing markets CMHC infused-pricing pushes ever higher with every passing year,” he writes (correctly) in a recent trade mag article.

“CMHC insurance functions as a form of monetary stimulus, artificially inflating housing demand.  Over the past 40 years, its effect on the market has been disastrous; incomes have become seriously misaligned from today’s house prices.

“The result is clear; young people cannot afford homes and the dream of home ownership is a reality now restricted to those 75 years and older. Meanwhile, those who are fortunate enough to afford CMHC-insured mortgages often face crushing debt burdens that deprive them and their young families of savings, life experiences and the superior quality of life that Canadians have enjoyed in the past.”

If state-financed and taxpayer-backed home loan insurance was wiped out, two things would occur. Lenders (with taxpayers support) would be far more attuned to risk. No longer would borrowers with the least amount of cash, the lowest downpayments and CMHC insurance get a lower rate than some dude with 40% equity in his house. In fact, a lot of new buyers looking for 20x leverage to buy real estate would be punted from the loan officer’s cubicle (if anyone goes there any more). Second, demand for real estate would be squished as monetary stimulus is withdrawn. Over time, real estate values would fall. It would be the mirror opposite of what the agency and the government are now doing, which is inflating prices by shoving more debt into the hands of buyers.

By the way, did you catch the following chart over at Wowa.ca, home of the data nerdettes who have time to monitor this stuff? They looked at 25 housing markets in North America, assessing affordability. And we suck best!

Of course, dismantling CMHC, or at least slapping it back to its senses, should go hand-in-hand with phasing out the evil PR capital gains tax exemption. When you tax the gains from every single asset class, except one, guess what happens to that asset? It becomes the object of greed, speculation, avarice, financialization, leverage and over-investment. No wonder our productivity is falling when so much capital is being redirected into residential real estate. And no wonder, as a consequence, the average family can’t afford the average home.

Establish a valuation day – like next Tuesday – and tax gains going forward.

Or keep encouraging the kids to bloat up on debt, hoping they’re too dumb to notice.

(They’re not.)

About the picture: “Hey Garth, here’s a picture of Duke living his best life,” writes Schester. “He’s an 85 pound Bernadoodle that’s two years old.  He lives in Northern BC and loves the different seasons. In response to yesterday’s column, I for one will be saddened if you and the crew pull the plug on the great advice you folks dispense for free with no strings attached. It’s your life experience that create the content and thats why it’s so valuable and should be taken for what it is.  Advice, take it or leave it. I stopped wading through the steerage section a while ago.  Turn that feature off for a while!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.