Revolutionary Moderation

Changes

Jim Flaherty has announced a few changes to CMHC rules in the hopes of deflating a bubble that he insists doesn't exist.

Some people may chalk up the timing of this announcement as the government wanting it to be ignored in the face of Olympic fever. I think it shows how quickly we've gone from zero to consensus that Canadians are living with a housing bubble, and that the government wants to curb that talk as quickly as possible, without curbing the market.

Unfortunately, the talk is due to an actual housing bubble, and the market has to curb to end it. Flaherty's changes will only force the people closest to the edge to take a step back, and not much of a step at that. I think we'll see more at the budget, if the talk doesn't slow between now and then.

Edited to add: The CBC article linked above keeps changing as details emerge and reaction is considered. One reaction at the end of the article almost knocked me out of my chair:

"This is a little bit late in telling Canadians we need to be more cautious in taking out a mortgage," Royal Bank chief economist Patricia Croft said in reaction to Flaherty's announcement.

Though she stopped short of calling Canadian real estate in bubble territory already, she said the April 19 date for implementation is actually likely to cause more short-term stimulation of the market, as people scramble to get in under the deadline.

"If you wanted to buy a house, wouldn't you now do it before April?" Croft asked. "It's even more evidence that house prices are going to cool down later this year."

When you hear a banker, for whom profits come from issuing mortgages and securitizing the debt, tell you the market is inflated, run for the hills. Run for your lives. That, or Patrica Croft deserves a medal for honesty in the face of her employer's short-term self-interest. Or, she's hoping to have some deflationary effect herself, better sooner than later in the eyes of even the financial industry.

The last actually seems most likely. It's entirely likely that banks have looked at the wreckage wreaked by the housing bubble and burst in the United States, and would just as soon avoid the worst of that, even at the expense of a few short-term dollars. Consider it a side benefit of having a financial system operated by a tiny oligarchy - they have the luxury of looking beyond the next quarter's profits.