Former Risk Manager at RBC Concerned About Risk - "The forces of gravity are as potent in the residential real-estate market as they are in the physical world: House prices do go down."

You have heard all these arguments before; on these pages and in posts at other blogs from various citizens concerned about a housing bubble in Vancouver. What’s different about the article on the op-ed page of today’s Globe and Mail, is that the concerns are voiced by a former senior manager in risk management at the Royal Bank of Canada. This is how paradigm shifts occur: first the loonie fringe shouts about something; then the blogosphere talks about it; then certain insiders voice it; and, in the end, the public accepts it.  Soon we will all have “known all along” that housing was in a bubble. -vreaa

Here are excerpts from ‘Why we need tougher mortgage rules’, by Louis Ganon, Globe and Mail, 23 Mar 2010 -

[T]he average price of existing homes in Canada [has] been on a tear, rising 19 per cent in the past year and leading many observers to believe an asset bubble was forming in the Canadian housing market.

If raising lending standards made so much sense, why wouldn’t the Big Five raise them on their own instead of asking Ottawa to beef up the rules? The reason is simple. The Big Five, as it turns out, aren’t the only game in town. A unilateral move on their part, as beneficial as it might have been for the system, might have backfired by allowing their more venturesome competitors to fill the void and gain market share at the Big Five’s expense.

In Canada, more risky mortgages (those with a down payment of less than 20 per cent) are insured by the Canada Mortgage and Housing Corp., whose chief mandate is to “promote” home ownership. As long as CMHC is willing to “insure” the mortgages, there’s no stopping less picky lenders from lending. Essentially, CMHC provides a back door through which low-quality mortgages can creep into the system. And if something goes wrong and CMHC can’t absorb the losses, who will have to foot the bill? You guessed it: We will.

These [the upcoming tighter rules] are all positive changes that will reduce the leverage in the system and make it safer, but Ottawa could have gone further. Reducing the maximum amortization period from 35 years to 30 would have been a smart move, and raising the minimum down payment from 5 per cent to 10 per cent would have made a great deal of sense. [Agree -ed.].

..the forces of gravity are as potent in the residential real-estate market as they are in the physical world: House prices do go down.

…when central banks start tightening monetary policy to mop up excess liquidity and stave off inflationary expectations and when capital markets start pushing back against massive government deficit funding and corporate debt rollovers, interest rates will have nowhere to go but up. So we can bet that mortgage servicing costs will also go up.