2006: Analyst Accurately Predicts Effect Of Looser Mortgage Policy – “Unintended consequence of these amortization changes will be that the real estate market in Canada will go up, thus making affordability slip again after a brief period of relief.”

International Real Estate Digest ‘Canadian analyst’ Simeon Mitropolski plainly and simply predicted the effects of longer amortization terms on Canadian RE prices in an article at IRED 18 Aug 2006. [Hat-tip to ‘Best place on meth’, at vancouvercondo.info , who’s handle still doesn’t fail to raise a smile.]
Why did the government loosen mortgage criteria when it was clear that the move would simply increase prices and not help true affordability in any meaningful fashion? Could it be that they were driven by a desire for short term political benefits for themselves, and to help out vested interests, rather than out of a desire for sensible long term policy concerning housing and household debt ?
Shouldn’t we all feel like idiots for supporting a system of government that rewards short term squandering over longer term wisdom? -vreaa

“CMHC announced new measures making mortgage loans in Canada more accessible for would-be buyers with moderate incomes. These measures include among the other things offering loan insurance on extended mortgage loan amortization periods up to 35 years, instead of 30-year maximum in force between March and June 2006. … In February 2006 in a 4-month pilot project the maximum amortization period was extended from 25 to 30 years. The last decision makes this pilot project ongoing and extends additionally the amortization period to 35 years.”

“The consequences of this new policy fall into two categories, intended and unintended. Intended consequences are to make some hesitant Canadians go and buy housing despite the rising prices and the rising interest rates. … Unintended consequence of this rising demand will be that the real estate market in Canada will go up, thus making the affordability slip again after a brief period of relative mortgage relief.”

12 responses to “2006: Analyst Accurately Predicts Effect Of Looser Mortgage Policy – “Unintended consequence of these amortization changes will be that the real estate market in Canada will go up, thus making affordability slip again after a brief period of relief.”

  1. “Intended consequences are to make some hesitant Canadians go and buy housing despite the rising prices and the rising interest rates.”

    This is the consequence of low interest rates too.

    “Unintended consequence of this rising demand will be that the real estate market in Canada will go up, thus making the affordability slip again after a brief period of relative mortgage relief.”

    While I agree this is the consequence I think the bigger consequence is the results of juicing a market already experiencing a speculative bubble. While governors and economists want consumers to be rational with their long-term debt planning, the reality is markets haven’t touched fundamental value for a long time and investor memories are short. I have little doubt adding credit-fueled incentives in a market long bereft of rationality will be deemed, in hindsight, negligent.

  2. It was a gross act of stupidity and another way to bury the young under a huge burden of debt by helping them over-pay for an asset and over-amortize it so that they never pay off principle.

    • It’s not just the young. How many 55 year old owners are taking out 25 year amortizations? I know more than one.

      Not that taking out longer ams is necessarily taboo, as long as the honest intent is to pay the loan off sooner without relying on prices being higher.

      • That’s just it. People no longer care whether they go to their graves with a mountain of debt. Shoot, if I was in declining health with no dependents, it would be mighty tempting…to take revenge on the banksters.

      • Many people will honestly say yeah I planned it pay it off faster, bail me out please, it is not my fault. The paying off early rationalization will tempt too many people who can’t afford it.

        The country where I come from originally was in a civil war and did not have mortgages that were generally accessible so about 10 years ago a 2 bedroom 1000 sfq apartment was 30K now it is over 130K over because mortgages were made more accessible. In this country per capita income is $13,100. Whereas before couples spent 10 years to save money and buy an apartment now, they save for 10 years to get a down payment and a mortgage that takes the rest of their lives.

        I think mortgage markets just end up raising prices to the point where everyone has to pay much more for housing because people can afford more without a mortgage markets houses would be much cheaper. I am not sure that as a society we are better off because mortgages are readily available.

      • “People no longer care whether they go to their graves with a mountain of debt”

        It’s likely much simpler than that: they think the debt will be able to be unquestionably resolved by liquidation of the property. The lender thinks this too: why would they lend them the $ if they thought it would evaporate? In other words, “real estate only goes up”.

        I’m not nearing retirement in the next while but I can attest for many of those who are: they care very much about carrying debt into retirement. If there is an outstanding mortgage with limited income coming in, there will be pressure to make their balance sheets whole again.

      • You know what the problem is? People don’t know what money is. That it represents work and thus debt represents the promise TO work.

        Somewhere in the last 20 or so years (especially in North America) Debt and Money have become one and the same and people do not understand either of them.

        This is really scary to me because it seems not only do private people have this “misconception” but so do many businesses (think .bomb).

        If someone would really audit all the books of all the Governments and large Enterprises they’d probably be trying to get a flight off-planet before sending the email with their findings from orbit.

  3. I think HELOC are the thing that gets the speculative bubbles going. Because without people can’t extract equity and buy more properties.

  4. and while some people use heloc as their atm, other use it to create more wealth, to be fair to say!

    • Fred -> When you say “use it to create more wealth”, do you mean use the increased equity in one property to purchase others ?

    • In Vancouver, if you’re unemployed, you call yourself a small businessperson. Nobody asks you whether your business is profitable or makes sense. Its so easy to do this with “free money from the house” and much more fun than making sandwiches for people.

    • Fred the percentage of people who use the ATM to create more wealth are few. Let’s say you pull 200K from your house, what are your options.

      Option 1: Use the pulled out money to buy more real estate, all this does is create a bubble causing a housing boom followed by a bust. No useful production comes out of this.

      Option 2: Use the pulled out money to consume. This creates fake demand pulled from the future into today, causing all sorts of business to exist that normally would not exist. this creates huge misallocation of capital.

      Option 3: Invest the money in the stock market. All this does is skirt around the laws that exist to control the amount of margin, if people put the extra heloc money into the stock market or bond markets bubbles will be created there, since without capital appreciation in those markets the person who takes out the heloc has no way of paying it back. If everyone does this then a stock market bubble will occur.

      Option 4: Invest the heloc money to start a business of some kind. I would argue that this option has the potential to create wealth. However, the person taking out the heloc is taking an enormous amount of risk. There are many other ways to finance a business. It is possible that real estate bubbles guaranteed by the government via CHMC is taking the risk of most loans will cause the banks to loan mostly to real estate developers instead of businesses, this causing even more harm. If the banks did not have such an easy source of profits in the form of government guaranteed mortgages then they probably will look to invest in Canadian business.

      Fred do you see any other options than the above for using an HELOC.

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