A ticking time bomb?
Only a year ago, the mainstream view in Canada was that the housing market was bullet-proof and that a US-style meltdown was highly improbable. Now sentiment appears to be changing following a slowing of sales, a build-up of inventory, and early signs of a price correction.
While it’s impossible to know what the future holds for the Canadian housing market, it appears that the risks are now on the downside. With any luck, Canadian house prices will deflate gradually, minimising damage to households, the economy and taxpayers alike. Perhaps such is possible given Canada, like Australia if less so, has seen a big shift in its terms of trade owing to the rise of China. But there is also a risk that prices will burst violently, as they did in the US, potentially exposing Canadian taxpayers to billions of dollars of losses.
As we explained on Wednesday, Mark Bouris and Christopher Joye from Yellow Brick Road Wealth Management have been campaigning hard for the Australian Government to ‘reform’ Australia’s banking system by implementing the CMHC (and Fannie Mae and Freddie Mac) system of guaranteeing pools of mortgages aggregated from all banks and non-bank lenders. Such a system is expected to end up costing US taxpayersbetween $120 billion and $190 billion, and from the above analysis, there are legitimate concerns that Canadian taxpayers could end up losing billions of dollar too from the CMHC.