Failed CMHC Policy Could Not Control Rising House Prices
July 16, 2021
Canadian house prices continue to rise and are increasingly unaffordable, writes Peter Watson.
Canada Mortgage and Housing Corp. failed at its attempt to slow the increase of house prices. This could affect homeowners and prospective homeowners.
Last year CMHC increased the financial requirements to qualify for mortgage insurance. Mortgage insurance is required for buyers who have a down payment of less than 20 per cent.
With higher financial requirements, the theory was there would be less demand to buy houses and therefore rapid house price increases would be slowed.
The CMHC policy objectives failed. House prices across Canada increased 38 per cent according to the Canadian Real Estate Association.
Last week CMHC is going back to the less strict lending requirements of last year.
There are two main reasons the CMHC policy failed.
One. There are other mortgage insurance competitors. They did not follow the stricter CMHC lead. Mortgage insurance business easily flowed to those companies.
CMHC market share for mortgage insurance business was close to half before the pandemic. Now it has been reduced to about a quarter of the mortgage insurance market. This information is from the Royal Bank.
Two. The best way to control rising house prices is by offering more houses. That is one of the foundations of economics, supply and demand.
For example, if 10 people want to buy a house and there are only seven houses available, those buyers will bid up the price of a house.
The opposite is true. If there are only seven people that want to buy a house but there are 10 houses for sale, then it will be a buyers’ market and house prices will not continue to escalate.
The key to slowing the increase in house prices is increasing the supply of houses
Housing affordability is a real concern for Canadians. The dream of home ownership is evaporating.
The noble attempt by CMHC to control escalating house prices failed.
Canada needs a strategy that encourages more houses to be built.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com