By Mike Whitney
Canada’s housing bubble has burst and prices have started to fall. Sales have dipped for 8 straight months as buyer interest has begun to wane. Housing sales in November dropped 12 percent from the same month last year, while previously-hot markets of Vancouver and Toronto saw declines of 28.6% and 16% respectively. Despite the media’s repeated predictions of a “soft landing”, Canada’s real estate market is headed for a bloodbath that will end in a wave of foreclosures, higher unemployment, slower growth, bigger budget deficits, and an aggressive campaign to implement harsh austerity measures aimed at dismantling the social safety net. This is the real objective of bubblemaking, to abolish the publicly funded programs that provide vital assistance for the poor, the elderly, the sick and the unemployed. Ballooning deficits provide the rationale for an assault on the institutions that protect individuals from the ravages of free market capitalism.
As was true in the US, Canada’s massive bubble was created by government and central bank policies intended to shift more of the nation’s wealth to large financial institutions via reckless credit enhancement. Low interest rates, lax lending standards, bogus appraisals, and giveaway gov insurance programs have all fueled a real estate boom which has more than doubled housing prices since 2002. At the same time, “household debt in Canada has risen by 135 percent, while disposable income and nominal GDP have risen by 54 per cent. Household debt growth over the past decade has risen nearly three times as fast as income growth, a trend that is clearly unsustainable. The average Canadian now has a record-high debt load equal to 154 per cent of their disposable income.” (“Is household debt threatening Canada’s economy”, The Globe and Mail) Actually, things are worse than the article suggests. Currently, the household debt-to-income ratio is 165 percent, up from 137 percent in 2007. That means that regulators, big finance, and the BOC have all been working together to inflate the gigantic bubble that’s is now beginning to unwind.
When the government guarantees 100% of every mortgage, then there are going to be a lot of bad mortgages. Also, prices will go up sharply, although those prices will not be supported by fundamentals, (wage growth, high unemployment, and demographics) but by easier access to credit, which is the basis for any asset-price bubble. The bottom line is this: Housing prices do not double in less than 10 years without government and Central Bank involvement. Canada’s housing bubble is policy, that much is certain. The goal of that policy will become clearer as prices fall and members of the Stephen Harper administration and the BOC call for painful restructuring of the economy, and “shared sacrifice” by all parties excluding the corporations and big finance.
In his masterpiece, “The Predator State“, James K. Galbraith refers to the merging of corporate and State power as that
“coalition of relentless opponents of the regulatory framework……whose major lines of business compete with or encroach on the principal public functions of the enduring New Deal. It is a coalition, in other words, that seeks to control the state partly in order to prevent the assertion of public purpose and partly to poach on the lines of activity that past public purpose has established. They are firms that have no intrinsic loyalty to any country. They operate as a rule on a transnational basis, and naturally come to view the goals and objectives of each society in which they work as just another set of business conditions, more or less inimical to the free pursuit of profit….. As an ideological matter, it is fair to say that the very concept of public purpose is alien to, and denied by, the leaders and the operatives of this coalition.” (“The Predator State”, James K. Galbraith, excerpted from “Predatory Pachyderms: Government of Big Business, by Big Business, and for Big Business”, Texas Observer)
This is a good description of what’s happening in Canada, where the levers of political power are controlled by big business. The government, the banks and the BOC have all joined forces to effect changes that will strengthen their grip on political power, enhance corporate profits, and shift more of the nation’s wealth to privately-owned businesses.
Here’s more from an article in ETF Daily News:
“Harper’s Conservative government has totally unshackled Canada’s banks, and allowed them to run wild with reckless lending; exactly as occurred in the U.S…..Harper’s government has been rapidly building Canada’s own “Fannie Mae”: The Canada Mortgage and Housing Corporation.
The CMHC has been buying-up mortgages so fast that the Harper government has had to raise its legal borrowing limit twice just since the Conservatives took power, and will soon raise it a third time as it nears its new limit of $600 billion. In proportionate terms, it is now larger than Fannie Mae (at its peak), and this occurs as a Euro Pacific Capital report reveals that, “once small, Canada’s sub-prime mortgage industry is now booming.” It goes on to report that there are now $500 billion in “high-risk mortgages” in Canada’s housing market — nearly half of the entire mortgage market.
Meanwhile, the obscene “home equity” loan market has also exploded in Canada. These “HELOC” loans (once known as “second mortgages”) have exploded by more than 170% in Canada over the past decade. This massive increase in needless debt inevitably and substantially increases the magnitude of any housing-sector implosion.” (“The Canadian Housing Bubble Nears Implosion”, ETF Daily News)
Canadian taxpayers will be on the hook for all the bad loans that the CMHC has insured. The debts will then be paid out of future incomes for working people (via slower growth) and by severe cutbacks in public spending. This is all by design. Bubblemaking is a very straightforward way to prosecute the class war. The modest attempts to “cool the market” by shortening the duration of mortgages (from 40 years to 25 years), is mainly an attempt to invoke plausible deniability as cover for what-amounts-to the deliberate destruction of the economy. Here’s more from an article at Financial Post:
“The use of Home Equity Lines of Credit (HELOCs) has been extremely controversial..(and)..have also contributed massively to household debt… Banks have been issuing HELOCs with a loan-to-value ratio as low as 80% i.e. issuing loans to someone who would need to borrow $80,000 for a home worth $100,000.” (Financial Post)
Banks are quite good at determining who’s “creditworthy”, when it suits their purpose. The housing bubbles in the US, Spain, Ireland, and now Canada, do not imply that the banks have forgotten “how to lend and who to lend to”, but that there’s an alternative motive for lending to people who are unable to repay the debt. This is something that former head of the FDIC, William Seidman, figured out back in 1993 following the S&L crisis. Here’s what he said in his memoirs Full Faith and Credit:
“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.”
Indeed. The bad loans are not accidental. They’re part of a plan to crash the economy, crush the middle class, gut social programs, slash public spending, widen the budget deficits, and implement excruciating “reforms” that establish a new economic order, in which, the state carries out the diktats of the corporate oligarchy “to the letter” and without hesitation. Journalist Patrick Martin at the World Socialist Web Site refers to a “social counterrevolution…. that is the common policy of the ruling classes of the entire world—from Europe to Japan to the United States.”
“In every country,” Martin opines, “the representatives of finance capital, having plundered national treasuries to bail out the banks and speculators, are now demanding that the working people pay the price…. Under conditions of deepening economic crisis, the ruling class is seeking to defend its wealth through a historic retrogression in the living conditions of the vast majority of the people.” (“Obama Spearheads Social Counterrevolution”, Patrick Martin, World Socialist Web Site)
That’s what Canada’s housing bubble is really all about. It is a stealth attack on working people and the institutions the keep them from abject poverty.