Minister of Finance James Flaherty’s Letter To Gord Goble – “A Home is a Family’s Most Important Investment”

Here is Gord’s reply to Flaherty’s reply:

“Thanks for your reply.

But here’s the thing (and I’ll make this short and sweet). Right now, one cannot buy a single family home anywhere near Vancouver or its immediate suburbs (Vancouver, West Vancouver, North Vancouver, Burnaby, Richmond, Ladner, Tsawwassen, New Westminster, or White Rock) for less than a HALF MILLION DOLLARS. Moreover, the few homes that are available between $500,000 and $600,000 are in such a state of disrepair they typically need to be torn down and rebuilt. The situation is, in a word, insane.

I know the housing industry is critical to Canada’s GDP. But through the availability of cheap up-front money and sub-prime lending, and the ease with which offshore investors can purchase homes in this country, your government has allowed a fiscally perilous, fully unsustainable situation to unfold. You have, in essence, funded the growth of a ready-to-burst bubble that’s no less onerous than the bubbles we saw in many US cities before that country’s massive crash. You continually warn us not to go even deeper into debt, yet you facilitate the very debt burdens (now at record levels) you warn against.


Thank you in advance.

Gord Goble”

Thanks to Gord for sharing this exchange with all of us.
The Minister of Finance talks of the steps that he has taken to “protect and strengthen” the housing market; most of them are simply reversals of steps he himself had put in place in the years before (40 year mortgages are the most blatant example).
It sounds innocuous, but note how Flaherty confidently states: “A home is a family’s most important investment”.
See how easily that statement passes as truth?
It’s not just a home, it’s also a financial instrument.
This is the kind of thinking that has encouraged Vancouverites to overreach and then overreach some more; it’s the fuel of the speculative mania.
Why pay ‘3x’ for a house that by all fundamental valuation methods is worth ‘x’?
Well, it’s not just a home, it’s an “investment”, and next year it’ll be worth ‘4x’.
Anyway, it’ll all play out, we’ll get a price collapse, and only then will the structure of the bubble be obvious to all.
– vreaa

45 responses to “Minister of Finance James Flaherty’s Letter To Gord Goble – “A Home is a Family’s Most Important Investment”

  1. I love Gord..

    • To Gord: Interest rates are set by the bank of Canada. I thought you knew better.

      • Gord certainly does know that; but the MoF has instruments at his disposal that can effect the availability of mortgage credit.
        At times the MoF and the BOC appear to be at odds regarding desired policy… Some have suggested that Carney wants to keep rates low for the general economy but wants Flaherty to tighten mortgage lending parameters.
        We know for sure that prior BOC governor David Dodge had stern words of difference when Flaherty brought in the 40 year mortgage; Dodge felt it was too loose, and he was correct..

      • Gord wrote:

        “But through the availability of cheap up-front money and sub-prime lending, and the ease with which offshore investors can purchase homes in this country, your government has allowed a fiscally perilous, fully unsustainable situation to unfold.”
        That comment tells me that he is unaware of who sets interest rates. Sub-prime meanwhile is lending below set rates. It is the business of banks and other specialty and high risk lenders such as Genworth. The government does not do sub-prime lending. Third, the fact that offshore investors can purchase homes here has only recently become an issue as an outcome primarily related to capital flight from China. I agree a solution is needed on that front to stem hot money that is making the bubble worse but I do not agree on assigning fault. We have had a fairly open policy for many years where foreign investment in Canada is concerned and so it is only the exception that is a problem, not the entire policy framework. While I can appreciate the frustration I also think that Gords complaint is somewhat misdirected. There is no single person who is culpable for the credit bubble. We know that because the credit bubble is in fact a fairly universal phenomenon that has reached most parts of the globe. I don’t subscribe to conspiracy either though so I would not want to address that as one of the reasons why so many people around the world have taken on so much debt and the risk it entails. At the end of the day everyone is responsible for signing on the dotted line and saying “Giddy-up”. I do not agree with a mindset that wants to focus all the blame on a single entity, person or organization and so I cannot condone Gord’s letter. I think we all know this is much bigger than that and it takes all the parts moving in cooperation with each other for such an outcome as we are now seeing develop. That means that everyone who participates has a share of the responsibility in the outcome and that includes all those who have been buying into a rising overheated market and engaging in bidding wars.

        Seriously, Is someone holding a gun to their heads?

      • Farmer: “Sub-prime meanwhile is lending below set rates.”

        No it isn’t.
        It’s lending to people who are at high risk of having trouble paying you back.
        With respect, Farmer, this is a bit of a rookie error in this area.

        By the way, Gord and you likely agree on almost all major aspects of the bubble.

      • …”Seriously, is someone holding a gun to their heads?”…

        Hmmm. Interesting rehtorical/analogy, Farmer. Strictly speaking, I think we would have to say, “No”. However, if I may be so bold, may I propose the following allegory as closer to the ‘actual truth’ [hint: generally speaking, handing a chimpanzee a loaded assault rifle is ‘injudicious’]…

        PS – Gord, “You GO, Man!”…

      • Your effort at correcting me is wasted since you did not acknowledge the first response but instead redirected as a means of avoidance. That is known as a failure in communication in my books. I have noticed you are not the type to admit your own error but are quick to judge others. Your site is therefore unreasonably biased and cannot be a fair representation of all views and opinions on the subject of Vancouver real estate although you say you encourage input. Simultaneously you have seen fit to brag about how you have screened out the comments of one specific individual. I differ with you on much of what you post as I find some of the negative political bias excessive and unwarranted. I have only kept my opinion to myself out of good manners but you will start hearing more of it.

  2. CanuckDownUnder

    “we are encouraging responsible home ownership through measures to help first-time home buyers”

    Oxymoronic, or if you prefer, just moronic.

  3. So much for the free market deciding. My other favourite: expansionary austerity.

  4. Some of Flaherty’s early campaign contributors related to real estate and construction. Elections Canada doesn’t publish information from 2007 and beyond.

  5. At the end of the day, each and every home buyer in this country is solely and wholly accountable for their own actions. The information, the warnings, the data and statistics on the market have been easily accessible to anyone who made even a small effort at looking these past two years.

    Indeed this site, amongst many others has been sounding the alarm in concert with the Bank of Canada, IMF, CMHC, Capital Economics, Federal Finance Minister Jim Flaherty and a multitude in the broad media amongst many others.

    The blame game does not fly in my books and anyone who resorts to that is just a simpleton looking for an easy out who prefers a nanny state over individualism. Will we all cry on each other shoulders when housing inevitably corrects as we all knew it would? Will we feel sympathy for those who wasted equity through lines of credit and left themselves no financial room to breathe?

    Lets all feel bad for the folks who spun around town in brand new financed vehicles, holidayed in the Bahamas, ate out 5 times a week and bragged about the boat they bought (the one that never gets used). Lets feel bad for the folks who threw it in all of our faces as they wasted their own credit and bragged about wealth that was in fact just a fiction.

    So, shall we then blame the world and the banks and the government and the BoC for our mistakes and take consolation in the fact that one or two policies that allow us to behave without discipline are the fault of the policy wonks and not our lack of due diligence?

    Can anyone here honestly say they have been able to dissaude anybody intent on a home purchase despite all the warnings? So who is at fault then? The buyers perhaps who we all agree are idiots for purchasing at the top despite evidence and warnings?

    I can only go back to repeating that we are all individually responsible for our own choices in life and buying a home at the top of the market is one of them. I am not sympathetic in the slightest to crybabies who want to turn the tables and dump their losses on someone else’s lap after the fact. If you bought high, that’s your problem. Not mine.

    • Lets all feel bad …

      The Vancouver Sun says we’re supposed to feel bad by assuming some kind of collective guilt because some Canadians bought houses in exotic locations:

      Is this the RE industry playing the race card to prevent any foreign ownership restrictions?

    • We would all be individually responsible if CMHC didn’t exist. Because of CMHC we’re all collectively financially responsible for the actions of the profligate when there is a downturn and CMHC runs out of reserves. So it’s your problem too.

      CMHC is on the hook for the shortfall between the balance outstanding on the mortgage on the date of foreclosure (with all missed payments, interest and the legal fees of the foreclosure added on top) and the depreciated forced sale value of the home. Even in a stable market shortfalls occur when the original down payment is only 5 or 10%; the shortfalls will be magnified in a falling market.

      • Craig Sterling

        This is true: but at least Canada’s liability is capped at CDN$800bn. Not much comfort to the Canadian taxpayer (of which, perhaps madly you may think, I hope once again to be among soon) but still. I say this because Irish, US, Spanish and UK banks threw the state in the hole for trillions. There’s a very interesting article by a man named Liam Halligan at the UK’s Daily Telegraph where he writes about European and US banks losses post-crash which are still (4.5 years later) off the balance sheet…

      • Yes, this problem is my problem too. It is the problem of anyone who is a citizen of the country. We are not all responsible for this disaster though. I have to ask, at what point do we stop blaming CMHC, Global TV, the Government, Mark Carney and the banks before we acknowledge one small truth.

        Greed and opportunism are at the heart of speculation.

        People believe they can outwit the system and get away with oversized profits and fat capital gains at the expense of other greater fools. They are risk takers right up until they actually lose money though.

        Then they all want to dump on someone else and shift responsibility.

        Lets put it another way. When you meet someone who has sold at the top and profited handsomely on real estate…..who do you think they are patting on the back for all the success?

        That’s right. They are telling you how smart they are, how quick witted and in tune, how connected to the power source and ahead of the herd they are. They NEVER say that CMHC helped them. Nor the Banks, nor the government, nor Mark Carney nor low interest rates. They brag on and on about what good investors THEY are.

        Lets just cut through the BS here. Blamers are losers.

      • Of course, the whole “capped at x billion” thing doesn’t include possible “emergency” bail-outs that we can be certain will be suggested.

  6. Great documentary covering banking, derivatives and mortgages.

    This is why our banks lobbied to kill the Volcker Rule. Nobody wants the party to end.

    • Oh yeah, I forgot. Its the banks who are to blame (sarc off).

      • Farmer I agree with what you’re saying, but when 68% of the country owns a home, constituency against lending regulations is a minority, so not much will change until people lose their shirts.

        BTW, the documentary above explains what CMHC does behind the scenes.

      • Farmer, I agree with what you’re saying tonight, but only to a point. When Joe Consumer is firmly and consistently hit over the head with deception, lies, advertising, adverNEWS, stories of Asian hordes buying up the entire BPOE, “White Rock investors” who aren’t White Rock investors, non-stop proclamations that real estate is the bestest best investment one can ever make regardless of the price (because we all know RE values ALWAYS increase, right?), and a government that on one hand warns us each and every week but on the other hand continues to nurture this insanity, I find it very easy to spread the “blame” way beyond Joe Consumer.

        When I wrote Flaherty, BTW, I had no intention of submitting the response to a blog. But I found that response so…confusing that I figured I’d send it to VREAA. IMO, it makes interesting reading.

      • No problem Watchdog. I just feel crabby today. I mentioned the other day where I had come across an article from 2007 that was almost identical in content to our daily conversations here and at that time I said I was doing a little mental house cleaning and introspection. Halfway there I guess. I do ask myself why I am commenting on the same repetitive topic day in and day out when little has really changed and the dull minds of house horny buyers cannot be molded to more rational thinking. Is there a point when it is clearly a waste of time to try to warn of the dangers? But then I had to conclude there are no victims here that are not also voluntary participants. Nobody is innocent and so tears of grief will not be shed on their behalf when the inevitable correction comes. I hope everyone here recognizes that. Every foolish buyer who jumped in with 5% down at the very peak of the market is someone who refused to hear the entreaties of the hazard. They genuinely believe they can game the market and win and that makes them gamblers, not investors. Therefore I have no sympathy for their coming loss nor will I accept their finger-pointing and blame so liberally handed out when they fail to win at the game.

        PS: Keep up the great work. I love your tweets.

  7. intellectual self-defense is an endurance event … tempo-tempo …

  8. vangrl, you wrote: “I love Gord..”

    Me too.

    Canuckdownunder, you wrote: “Oxymoronic, or if you prefer, just moronic.” Truly.

    Unsurprising that the U.S. is the one other country Flaherty mentions as being incredibly destructive (as it was indeed), whereas Craig Sterling points out that Irish, Spanish and British banks also threw their citizens under the bus.

    And VREAA host, Jesse, and others, thank you for pointing out both the smugness and hypocrisy of Flaherty’s letter. I’ve always loved what I’ve seen as the Canadian eye for and extreme distaste for dishonesty and blather, and it’s wonderful to see you all telling it like it is when someone’s trying to fool all of the people all of the time.

    • You and I will have to disagree today, Vesta. I think you have criticized the wrong letter. My point of view is that if a person is going to write to the Minister of Finance on an important topic such as the developing housing bubble (and make accusations) then they should at least make an effort to understand the basic workings of the system. Gord does not seem to know. The fact that Vreaa jumps to his rescue before the man even answers on his own behalf is just evidence of the failing.

      Perhaps Gord will speak for himself and not live under the skirts of others.

      • Farmer: See my comment to you above. [You stated that “Sub-prime meanwhile is lending below set rates.”..whereas, it isn’t, it is lending to people who are at high risk of having trouble paying you back.]
        The fact that you don’t know the meaning of the central term ‘sub-prime’ should give you pause.

      • Let’s not get too quarrelsome on this point. Yes, Gord’s letter is not perfect, but I’m still glad that he wrote it.

        In the future, we could perhaps do a collaborative online vetting of any future letters to Flaherty. I’m sure it would be educational for everybody.

        Individually we are perhaps not economic geniuses (well, it would not surprise me if at least one of us has a PhD in economics), but collectively I think we do pretty well.

      • I saw your response and did not think it was worthy of answering, Vreaa. You need to lighten up and let others speak for themselves. I am quite sure this post will get deleted (as have many others) but that does not make you “right” in creating a one-sided argument where only you can win because you are the site host. Don’t you think that maybe you are the one who is the rookie in this conversation? Very sad….nobody was even talking to you. Your opinion was not invited.

  9. Thai-born Chinese Canuck

    Hi VREAA and all!

    I have been a loyal fan of your VREAA blog for 2 years since my last visit to Vancouver. I want to give an update to you Vancouverites.

    One of my classmates and now one of my best friends, who owns and runs the most luxurious Thai restaurant in Yunnan and all of China for 5 years is very insightful about many Chinese nouveau riches. He told me just 2 days ago during our reunion dinner that Beijing has begun to clamp down on rich Chinese attempting to smuggle their money out of the country and park it in the form of real estate offshore, especially in Canada and Australia. Mainlanders who plan to deliver a child in HK will no longer be given HK residency status. Basically, the loophole is being closed, making it harder and harder to bring money out. So the popular myth about Chinese money being poured into the Vancouver real estate is only to be discounted.

    Vancouver is not the only place in the world, in which home prices are overly inflated. Like Canada, most countries which barely escaped the impact of the 2008 financial crisis, are in eerily similar situation. I currently live in Bangkok and have seen the condo market continuously bubbling for 5 years. Renting money here is also cheap as the corrupt government and Thai real estate cartels colluded to lure savers into investing in condo units. The popular myths here are that foreigners, North Americans, Japanese, and Europeans, love to come and retire here for darn cheap living costs and first-class but cheap private medical services and they need somewhere to stay/live. Earning peanuts interest income, many gullible savers have poured money into buying overpriced condo units (THB 100K/sq m or C$309/sq ft) in prime locations and waited to rent them out to the mythical foreigners at an astronomical rate like THB 60,000 or C$2,000/month. One of my cousins bought an expensive luxury condo unit in the heart of Bangkok’s high-end shopping and dining street – Thonglor. The condo has been sitting empty for 3 years. She is now looking to selling it, so are others. The SFH market here is not different.

    HELOCs and similar equity loans are also popular here. People are encouraged by banks to use their homes and cars as ATMs. You can see HELOC commercials everywhere from TV, bus stops, bus shelters, radios, posters, etc. People are complaining about their (in)ability to make ends meet each month and debt loads.

    To me, these are scary. And I look into Vancouver. It’s not different!

    • Thanks Thai. If your post was three times as long I would still be reading with rapt fascination. I hope you will come back and add more commentary because what you are talking about is really interesting to me. I agree that the credit excess we are seeing is global in nature and I have seen it first hand. Every continent is now affected and this creates its own special risks. I think we are witnessing the outcome of one of the great distortions of liquidity intervention as money leaks from Europe and America into all other parts of the world and attempts to pump up a past bubble but instead creates new ones in its wake. Food price increases trebling in Third World nations is just one example. There are so many charts showing parabolic or stress related moves now that it should be apparent to everyone something must give way soon. These omens will not end in quiet way by my reading. What else can you tell us about restrictions of hot money flowing out of China?

      • Thai-born Chinese Canuck

        Thanks for your reply, farmer. I can’t give a specific detail about the restrictions on hot money outflow from China. I will have ask my friend about it later. He said to me that his rich customers, who are still thinking about emigrating, are being faced with so many added hurdles to bring the money out. I believe you are already aware that most rich Chinese want to emigrate when they have accumulated wealth to a certainly considerable amount for they fear that the government would go after them and seize their wealth without a proven source one day. Have you heard of the recent scandal about Bo Xilai? He is just one of those examples.

        In the case of Thailand, a third world country (politically incorrect here to call this country as such sometimes), I am not surprised if the corrupt government does not care about household debts and widening income gap. Although Bank of Thailand’s governor is very concerned about the ravaging inflation, he is in part responsible for the country’s main sources of income (exports and tourism) as well by keeping the interest rate so low. While the corrupt government even wants the central bank to cut it further to encourage the already heavily indebted working and middle class to spend more and save the real estate cartel!

        Bubble is always a hot potato everywhere. No one wants to deflate it because if one does it clumsily by popping it and hell suddenly breaks loose, all the fingers will point to him/her.

  10. Agree with Farmer here, our government is all but guaranteed to let us down. A great many people have chosen with free will to NOT speculate.

    I have popcorn and am going to leave the blame in the package.

  11. “But through the availability of cheap up-front money and sub-prime lending, and the ease with which offshore investors can purchase homes in this country, your government has allowed a fiscally perilous, fully unsustainable situation to unfold”.

    Maybe Gord’s initial letter was more eloquently penned. This follow up reply will most certainly put him on Flaherty’s flake list. I think Flaherty’s office is now finished communicating with Gordo

  12. Carioca Canuck

    I received the exact same form letter from Flaherty about a month ago as well.

    Basically I said that they were solely responsible for the bubble, as a result of their deliberate manipulation of the mortgage market. Added that the abuse of the foreign immigrant investor program and the resulting purchases of “passport properties“ at any price didn`t help either, and had to be stopped.

    I am not naive to think that they actually read our letters………

    • They send out form letters. Don’t take it personally, there’s only one of him and thousands of us, most who will never vote for his party no matter what they do.

    • haha, I had to read this whole thread to finally come across the guy who realized that this was a form letter. I was waiting to state that if you think this is anything but a form letter you are deluding yourself. All this talk about how if Gord just penned a better letter then it would have been so much better… if went more like this:

      1. Aid opens random letter
      2. “Oh, this one says house”
      3. *Sends housing form letter*

      In fact, I’ve read this same form letter at least twice on the blogs. Get over it, there is nothing you can write them to get a direct response. You’ll be lucky if a statistic is kept that tallies the number of letters they received with the word house in them, at maximum.

  13. Reading between the lines of Flaherty’s form letter: Keep buying suckers – the Canadian economy depends on it. We are so scared of deflation and a loss of confidence that a massive asset price bubble or two is just collateral damage and the only way we know how to deal with a structurally weak economy and unsustainable public debt is to make credit even more easily available. We have outdated monetary/macroeconomic models that show the only way to close an output gap is to lower interest rates even if it means negative real rates. Spiralling housing debt and a RE bubble are just minor side shows to what we think we are trying to do.

  14. Note to Farmer:

    Apologies if anything previously has offended.
    Your prior comments have been valued by other readers/commenters, and some have explicitly stated so. We’d like you to continue to be an ongoing part of the discussion.
    None of your comments on this site (551 at last count, all still up on prior threads) have ever been edited/moderated away.
    Only one individual has been censored/screened from the site, simply because his postings are largely complete gibberish (samples on request!), not because they express opinions contrary to ours.
    We don’t claim to be a ‘balanced’ site (an impossible task), but a site of personal stories and opinions; host opinions included. We make no excuse for that, it’s the nature of the site and of the discussion. We do ask that we all largely stick to discussing the subject at hand, Vancouver RE market and its effect on the citizenry.

  15. Spot on with this write-up, I really believe that this amazing site needs
    much more attention. I’ll probably be back again to see more, thanks for the info!

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