Home > real-estate > Did Mortgage Backed Securities boost Home Ownership Rates in Canada?

Did Mortgage Backed Securities boost Home Ownership Rates in Canada?

In the US, there is debate within government, media and blogosphere on the role of government in the housing market… primarily in response to the poor performance of Government Sponsored housing Entities (GSE) – Fannie & Freddie… The housing GSEs were established to promote home ownership… so to fix Fannie & Freddie, home ownership needs to be fixed.

Home ownership rate (HOR) is the proportion of households who own their home (either outright or with a mortgage).

What is the situation in Canada? Since Canada supposedly lags the US housing market by a couple years… I am going to try and analyze where Canada stands and how we got here…

The Canadian housing GSE – Canada Mortgage & Housing Corporation (CMHC) was established in 1946 to solve housing shortage after WWII. Today it plays a major role in promoting home ownership by providing mortgage loan insurance since 1954.

Source: US Census Bureau via Wikipedia, Statistics Canada

Note: Unlike the US, census in Canada is every 5 years, the next one in 2011.  We can perhaps expect home ownership rates to decline if Canada indeed lags US but given the recent frenzy (see here) in housing market I somehow doubt that home ownership rates will decline… just yet. Will Canada experience a housing crash like the US? I don’t think so… see earlier posts (here & here).

So what caused home ownership rates to rise dramatically from mid 1980s to 2006 in Canada? This chart tries to answer that…

Chart of Home Ownership Rates vs Mortgage Rates

Source: Statistics Canada & Bank of Canada

As mortgage rate decreased, home ownership rate increased… BUT the role of 2-key CMHC policy changes along the way is grossly understated…

  • 1986 – Introduction of Mortgage Backed Securities – reduced the funding cost for mortgage providers by letting non-bank financiers enter the housing market, thereby increase competition and reduce the cost of mortgage for a home buyer… I do not know where we would be if there was no MBS (I believe securitization is a great financial innovation)!
  • 1990– 5% Minimum Downpayment – this policy change provided a huge boost to housing demand…especially from first-time home buyers.
  • 1999 – 0% Down payment & 40 year mortgage terms…lets not go there, we all know how it ended!

0% down and 40 year term mortgages are no longer “legal” and are not insured by CMHC since 2008. This policy change was introduced due to rampant speculation in the housing market and a precautionary effort by Jim Flaherty to avoid a US style housing collapse.

Note: 0% down mortgages are still available by working around government policy.

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