Blogs & Comment

Housing bears make more unsubstantiated claims

Canadian housing bears have allowed the absence of peer review and other rigorous due-diligence to lull them into issuing a range of poorly supported claims.

(Photo: Gregor Schuster/Getty)

I’ve looked previously at some of the arguments made by the housing bears, for example in “Housing crash predictions using wrong indicators.” I would now like to look at some of their other claims, notably that the housing market in Canada is headed for trouble because the Canada Mortgage & Housing Corp. (CMHC) is nearing its mortgage-insurance cap of $600 billion. Also, their claim that successive tightening of mortgage-lending standards by Finance Minister Flaherty spells bad news. As we might guess, a less gloomy picture emerges if we take the analysis of these two topics a little deeper.

One problem with the bearish view is that the second-biggest insurer of mortgages, Genworth Canada, is positioned to pick up business turned away by the CMHC. The bears don’t believe Genworth will be picking up the slack because “they too are subject to a parliamentary cap of $250 billion,” at least as stated in this article, “The under-the-radar changes that may soon deflate (or pop) the housing bubble.” 

But it’s an analysis that skims the surface and is light on facts. In a conference call with analysts earlier this year (as reported in the Globe and Mail) Genworth CEO Brian Hurley responded to the issue of mortgage-insurance caps as follows: “I just want to clarify that our business has plenty of capacity for 2012 and beyond …. There is plenty of runway for both entities in the private sector [Genworth and Canada Guaranty] to grow with multiple years of production opportunity ahead of us.”  Moreover, according to Hurley, parliament is expected to pass legislation by year’s end that will increase Genworth’s mortgage-insurance cap to $300 billion.

As an aside, I would guess the Conservatives are willing to let the two private sector mortgage-insurers take on more of the underwriting market because the CMHC is a political hot potato these days. Also, Genworth and Canada Guaranty are not as badly-managed as CMHC. Nor do they have as much of an incentive to go overboard with insuring mortgages because of their bottom-line discipline and the fact 90% of what they insure is government backed compared to the CMHC’s 100% backing. 

Another problem with claiming the CMHC’s $600-billion cap sounds the death knell is that no political party in Canada wants to see house prices plummet like they did in the U.S. By reigning in the CMHC, the Conservatives are attempting to moderate the boom, not tip into it into a meltdown. If signs gather that such an outcome is developing, does anyone think the Conservatives will sit idly by? Of course not. They will take steps to change regulations and the institutional framework to avert a hard landing.

Similarly with the argument that Finance Minister Flaherty’s tightening of mortgage-lending rules will prick the bubble. If the changes look like they are having more than just a moderating impact, rest assured that the party in power will adjust course. “As market conditions evolve … the Government of Canada will revisit these rules and make any necessary amendments deemed appropriate to ensure the long term stability of the housing market,” notes the second-quarter financial statements of Genworth.

From the reader messages posted in article comment sections, housing bears appear to regard persons associated with the housing industry as sources of BS, to use their abbreviated terminology. But many of these industry workers are on the ground and have first-hand knowledge of what’s going on. Moreover, the statements these workers make, particularly CEOs of public real estate firms like Hurley, are subject to legal recourse if investors or clients feel misled or kept in the dark. I would tend to give more credence to the competency of their views than those of housing bears who post analyses and charts at the click of a mouse, all the while unconstrained by due-diligence standards or even such things as the peer-review process that serves academia so well.