The Canadian Real Estate Association this week [4 Jan 2010] asked its 100,000 members to send a form letter to the Minister of Finance, Jim Flaherty, urging him to keep mortgage lending loose. The realtors are pretending to take the high ground on an issue where their motivation is clearly for the health of their own business. It would be far more honest and acceptable for them to simply come out and say that they are worried about themselves, but they hide behind a faux concern for ‘Canadian families’ and ‘homebuyers, homeowners and the economy’. They aren’t kidding anybody, including, one hopes, the Minister of Finance.
Loose lending has fueled the RE Bubble, and has made housing less, not more, affordable. The longer that cheap money is available, the larger the debt burden will become before the inevitable bust. Loose lending is profoundly detrimental to the health of our society.
The CREA appeal has been thoroughly discussed on other RE blogs but, for the sake of the historical chronology of the bubble, we headline this noteworthy event here, and post images of the CREA ‘Call to Action’ to their realtors, and of the CREA recommended form letter to the Minister.
Here was my letter, for the record:
To
Hon. Jim Flaherty
Your MP’s name here
Sirs,
I am writing you supporting potential changes to mortgage financing rules in the upcoming year. As you are undoubtedly aware, the average Canadian household debt to household income ratio has increased significantly in the past number of years and has now exceeded that of the United States. This was made possible by historically, and unsustainably, low interest rates on mortgages. As has been shown in other OECD countries, there is some evidence to suggest that households are primarily concerned with their short-term financial health — the ability to service today’s debt with low interest rates — and less concerned with their long-term financial health — the inability to service service tomorrow’s debt with high interest rates. I have not seen any data or arguments to suggest that household debt will start decreasing in the coming year as long as interest rates remain low. My concern is that without further tightening of mortgage financing rules, Canadians will continue to take on debts that are unsustainable in the long-term.
While I am a believer in free markets, the growth in household debt is not sustainable when interest rates rise and I am not confident households will start saving while debt is so “cheap”. If measures are not taken sooner rather than later, the resulting overhang of debt will put Canada at a distinct disadvantage relative to its trading partners, whose households have started to rebuild their balance sheets and will be in a much better position to weather the inevitable interest rate rises in the coming years.
Sincerely
Your Name
Your Address
jesse -> thanks for posting that.
Here’s my letter, cc’d to my MLA. I wrote it in a hurry, so the logic isn’t what I would bring to a bullfight but I figure the politicians only really care about what the issue is, and if you are for or against it.
Dear Finance Minister Flaherty,
It has come to my attention that the mortgage and real estate industry is beginning a lobbying campaign to dissuade parliament from making increasing restrictions on mortgage lending rules. I would like to voice my SUPPORT for further restrictions in this area.
Fueled by high home prices and easy credit, the level of household debt in Canada has climbed to extreme levels. This in turn has fueled a large real estate bubble. In my own community of North Vancouver, it has become almost impossible for a family of average means to purchase a home in which they can raise a family. Home prices are completely out of line with fundamental values due to artificially low interest rates, 35 year amortizations, and 5% downpayment rules. In my community in particular, this is resulting in many young families leaving town. The economic recovery that is supported by this explosion of credit is being born on the backs of first time homebuyers who will be financially crippled for many years to come.
I strongly encourage you to put a stop to this situation which imperils the future of so many young families. Please increase the minimum downpayment to 10% and reduce maximum amortizations to 25 years as they have been traditionally. Home prices are over-inflated to the point that it will damage the social fabric of many communities in the years to come. A correction and return to long-term levels is desperately needed.
tincup -> thanks.
I wonder how many letters like yours and jesse’s the MoF will get?
On the other side of the ledger, one hopes his office will simply be able to lump together all the realtor letters as one giant hand-out plea.
One hopes the Ministry of Finance will recognize a lobby group coming a mile away. I’m not a registered lobbyist so I must appeal to the greater good.
My letter to the finance minister below written in hurry, echoing tincup on my logic could be better. This letter made me realize that I am not a real estate Bear, I am just not willing to over pay for a home.
—-
Dear Minister of Finance,
I am writing to you to add my voice as a concerned citizen about the current unaffordability of housing and massive amount of debt of the Canadian public at large and I believe that we are in the same position as the USA was in a few years ogo. I live in Vancouver and my family income is over significantly over the median and average family income yet a house is 10x our annual income.
Everyone I talk too seems to have mortgage debt of $500,000 or more on 5/35 mortgages. I have spent the past 6 months studying the housing market, and I can tell you from where I stand that the government policies have created this enormous housing bubble in Canada and I believe that government policy can help deflate this monster before it gets even bigger and cause more damage than it has already caused.
5/35 mortgages are truly perverse for the following reasons.
1) CHMC premium on 5% down is 3.15% leaving new owners with 1.85% of equity in their house
2) Over the first five years of the mortgage the owners will pay down a tiny portion of the total principle around 7%
3) On selling the house the realtor fees are 1.5% to 3%
4) So someone buying a house with 5% is actually starting out so with little equity that even a 2% drop in prices in cause negative equity and that will lead to default. So while the government’s intentions was to increase home ownership there is no way I would put myself and my family in financial peril by using a 5% down payment all that the government policy did was allow foolish Canadians to risk their financial well being with 5% down payments and bidding wars that have raised the price of homes to record levels creating a huge bubbles.
5) Banks no longer have an incentive to keep lending practices tight because my tax payer money in the form of the CHMC is backing their bets, this is perverse while the banks still nickel and dime me to death with all the fees they charge they rake huge profits because my taxes are backing their bets in the housing market. I don’t this ends well for the average Canadian citizen.
6) The record cost of real estate is crushing our small business I am a small business owner, and I can not hire full time employees because I can’t afford to pay them enough to cover their housing costs which are astronomical. Sure we have a low CPI inflation which of course does not include housing, but how many things must my business sell at low prices to cover the inflated prices of housing, and rents … etc this is truly unsustainable and a huge blow to our competiveness as a nation is a brutally competitive global economy, not only must we compete with low cost labour from overseas, we are being crushed by insanely high real estate costs.
When the Canadian housing bubble burst are you going to have a policy of high inflation and wipe out my savings, or will you listen to the real estate lobby and the home owners. We truly live in crazy times when housing has become gambling and families make more money from the rise in housing prices than they do from their jobs.
Report after report in the newspapers and speeches from the Bank of Canada Governor warning about debt levels. Minister no amount of talking and warning will do, sadly our Canadian Education systems leaves most of us financially illiterate, the only thing people understand is what the monthly payment is, so please restore some sanity to the mortgage market don’t allow CHMC to insure mortgages below 20% and more than 25 year amortizations otherwise CHMC will suffer the same fate as Freddie Mac and Fannie Mae in the USA and my tax dollars will have to bailout CHMC.
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