CMHC and others issue warnings about Canadian housing market

Canada Mortgage and Housing Corp.(CMHC) released an unsettling picture of what could happen if there were a severe correction in the Canadian housing market.

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The CMHC used a stress test or worst case scenario to test what would happen in the Canadian Housing market if there were a quite significant downturn in the Canadian market. The CMHC projected a 30 percent plunge in home prices and a 5 percent increase in unemployment. This is what happened in the U.S. in 2008 when its housing market imploded. In such a scenario the CMHC would be faced with eight times more insurance claims than now, with total claims of $5 billion over five years. The CMHC profit of $7.5 would swing to a $2.8 billion loss.

Many analysts think the CMHC scenario based on what happened in the U.S. is quite unlikely to happen here. Sal Guaterei, an economist at the Bank of Montreal (BMO), notes in the U.S. there was a huge problem with sub-prime borrowers, a situation that does not really exist in Canada. While Vancouver and Toronto would be vulnerable if there were sharply rising interest rates and rising unemployment, even this would require a considerable shock to the economy that seems not likely to happen.

The CMHC notes if there were global economic deflation for five years, this could hurt the market. Oil prices being very low, for example $35 a barrel, for a similar period would also rock the housing market. Many analysts are concerned about global deflation, with bond investor Bill Gross noting the global economy is approaching deflationary growth. The IMF has voiced a similar concern. While oil prices are projected to stay relatively low for some time, most analysts do not see them going as low as $35 a barrel for any length of time.

With deflation, house prices could fall, and people would lose money on their investment in their house if they sell. At the same time, if buyers think that prices will fall further they will not purchase homes new or otherwise, so that there will be less investment in new housing and falling house sales.

As well as the CMHC, the Canadian Centre for Policy Alternatives(CCPA) and the OECD have also issued warnings about the Canadian housing market, especially if there is a short-term downturn in housing prices. The present heated housing market is partly caused by the baby boom bulge that created a big demand. Things are now changing.

Ben Rabidoux, of North Cove Advisors, a research firm says: "One of the more concerning developments that no one's talking about is the demographic trend. We are adding the fewest number of people to the working age population that we ever have."The Bank of International Settlements notes that in an economy where more people are leaving the workforce than entering, as is starting to happen here in Canada, the economy as a whole begins to shrink and house prices are lowered as well, as older home owners put houses on the market. This trend happens when home owners reach between 60 and 70 years. The baby boomers are now beginning to enter that age range. In Alberta those older homer owners are often taking their homes off the market because they are not getting the prices that they want but others, because of their economic situation, may be forced to accept those prices. Builders of new houses will need to sell their houses to pay their expenses often at prices that yield little or no profit.

Rabidoux though does not predict possible doom for markets such as Toronto. Some housing will still attract good prices but others may not. He says some expensive homes built in rural areas are not likely to sell well but family-sized homes in popular city areas will attract those who can afford family homes since there is always a limited supply of these homes. As the boomers move out of homes the demand for larger condos in prime areas will remain strong. Rabidoux cautions however that his predictions have been wrong before.

The Canadian Centre for Policy Alternatives(CCPA) worries about the debt loads that high house prices place disproportionately on young people. The OECD has issued a warning specifically about the risk of a correction in Toronto which has seen a huge increase in condo development. The OECD pointed out that there are high debt-to-income levels in Canada and urged tightening of mortgage lending in overheated markets such as Toronto and Vancouver. The OECD said: "In Ontario, and especially Toronto, economic activity has been relatively buoyant and demand by foreigners has been boosted by the falling Canadian dollar. That said, newly completed but unoccupied housing units have soared in Toronto, increasing the risk of a sharp market correction."

The Bank of Canada estimates that Canadian house prices are 10 to 30 percent overvalued at present.

Sharply falling prices could badly hurt younger home owners says economist, David Macdonald, of the CCPA:"Declines in real estate prices would have a strongly disproportional impact on young home owners, If, or more likely when, real estate prices fall, families in their 20s and 30s can expect to lose a substantial portion of their net worth, and could find themselves owing more than their house and other assets are worth."

He points out that the debt-to-income ratio for people in their thirties is now at a new high of 4 to 1 about double what it was in 1999. This is a higher ratio than in any other age group.

Macdonald offered some numbers to back his views. Even if the housing correction is in the mid-range of what the Bank of Canada has projected that families with people in their thirties would lose on average $60,000 or close to 40 percent of their net worth. One in ten families with people in their thirties or younger would end up with negative net worth. Macdonaldconcludes: "In cities with higher prices, like Toronto, Vancouver and Calgary, young families would likely see declines in net worth dramatically worse than the national average due to higher leverage, A badly managed downturn in real estate prices could wipe out the wealth of a large number of Gen-Xers and Gen-Yers. We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction."Foreign investment can also have significant effects on Canadian housing markets especially in Vancouver and also Toronto as discussed on the appended video.

Privatization in City of Winnipeg

It seems that more and more long term contracts for water, sewage, etc. are being contracted out supposedly to save money but often at the expense of quality and service. These public private partnerships (PP3s) are increasingly popular and often increasingly under scrutiny for their shortcomings. This article illustrates some of the problems with the Winnipeg city plans. This is from the CCPA Manitoba office.

Fast Facts: Contract with Veolia for waste-water treatment does not pass the smell test
by Lynne Fernandez
Manitoba Office |
On May 12 EPC unanimously voted to accept a report prepared by Winnipeg Public Services. The Report recommends that the City award a contract to Veolia for the design, construction and, it appears, the shared operation of the South and North End sewage treatment plants. The Report assures readers that this is a good deal for Winnipeg. But those of us who have been following the process are not convinced.

Winnipeggers will be forgiven for not fully understanding what is at stake, or for not being able to follow the complicated, increasingly arcane recommendations and business plans leading to this week’s report. The CCPA and citizens’ groups raised enough concerns about the initial Plan A — first presented in November, 2008 — that the City came up with a Plan B. Plan B was passed by council last July, in spite of the many concerns voiced by citizens’ groups.

Plan B did not allay CCPA’s concerns around the plan to create a Municipal Corporate Utility (MCU) to provide water and potentially other services for the City of Winnipeg, and to enter into a public-private partnership (P3) for the upgrades to and operation of the North and South End Sewage Treatment plants. The MCU is on hold pending amendment of the Winnipeg Charter by the Province.

The mayor and his supporters responded to these concerns by removing the terms “P3” “corporatization” and “strategic partner” from their vocabulary. This isn’t the first time bureaucrats and the Mayor have tried to control the message by changing language. Neither P3 nor strategic partner are to be found in this latest report (Plan C). The first question that arises, then, is whether or not the contract with Veolia is a P3 and if so, what kind of P3.

Some P3 models protect public interest more than others. The City, well aware of these differences, modified the wording in the Report so that “the Public Service has pursued an innovated model of collaboration with world-class sewage treatment service providers where City utility staff will continue to operate and maintain the sewage system”. So the word operate has been taken out of the mix, making the arrangement a design/ build model of a P3, preferable to a design/build/ operate model.

But the plot thickens. The recommendations on page 1 of the Report tell us that the CAO will be granted authority to “enter into a multi-year contract with Veolia that conforms to the terms set out in this Report”. The terms are summarized in the vaguest of terms, but we learn on page 4 that “multi-year” means 30 years. We know that the upgrades have to be completed by 2014, so what will Veolia be doing for the remaining 26 years? Operating the waste-water treatment plants, of course.

The report assures us that City management and Veolia experts will work together in the spirit of partnership to provide service excellence and best possible cost of service for citizens” and that City staff will continue working under the supervision of City managers.

Where does all this leave us? We appear to have a design-build-operate P3 with a multi-national corporation infamous for its predatory business practices in developing countries, and with a less-than-stellar reputation in the developed world – in spite of what the report claims. We will never know the details as Veolia will claim that it has the right to safeguard its business transactions. For example, the City will be able to terminate the contract “if ever required”, but we are not told at what cost.

Supposedly this arrangement will save Winnipeggers between 10 and 20 percent over the 30 years. Details as to how they arrive at this estimate are sketchy. Why, for example, did they use a discount rate of 6% to calculate net present value? These small details can make a big difference to the bottom line.

They claim that taxpayers will be protected throughout the 30 year “program” because if service standards are not met, or if capital cost targets are missed, Veolia will forfeit margins to “share these costs with the City”. Will the City have to share such costs under all circumstances? What if Veolia is solely responsible for such shortfalls? Supposedly the City is willing to share the risk because it “will continue to control operating and maintenance parameters by which the sewage system shall operate”. This may sound reassuring, but a cautionary tale is in order at this point.

Consider a report by about the Indianapolis Department of Waterworks and its P3 partner, Veolia. The report found that “the city too often relied on the Department of Waterworks’ board, on consultants and on the private operator, Veolia Water, rather than on the department’s own staff ‘to ensure safe and efficient operation, maintenance and management’ of Indianapolis Water”.

Veolia is the private partner in a 20-year, $1B P3 contract to run Indianapolis Water. The author — who ironically works for CH2M Hill, one of Veolia’s competitors — is critical of Indianapolis’ water department and “its ability to ‘stand up’ on behalf of taxpayers”.

One must be careful when relying on a report by Veolia’s competitor, but this account is more a defence of public oversight of a P3 than it is a criticism of Veolia. The tone of the report is that we expect private companies to behave badly, so we need strong public oversight of these partnerships.

This brings us full circle to the most glaring omission in Winnipeg’s Plan C: the role of the MCU in the contract between the City and Veolia. Will the Province ensure that Winnipeg’s proposed MCU provides sufficient oversight? The fact that the Indiana Utility Regulatory Commission — the equivalent to our Public Utility Board — is not standing up to Veolia is cause for concern. Not until we know how the Province is going to amend the Winnipeg Charter and how the MCU will accommodate the contract between the City and Veolia will we have a sense of what this deal means for Winnipeggers.

More than $2 billion and the future governance of our public utilities will be at stake on May 19 when council votes on this issue. We hope Winnipeggers will be there to register their concerns.

Lynne Fernandez is a research associate with the Canadian Centre for Policy Alternatives, Manitoba.

Post Secondary education an election issue in Manitoba

This is from the CCPA Canadian Centre for Policy Alternatives. The Feds reduction in funding for colleges has placed poorer provinces in a difficult position as they must make up the difference even if they are just to keep funding at the same levels. I don't know where they get the figure that one in four children in Manitoba is aboriginal. That seems rather high although certainly birth rates among aboriginals are much higher than in the general public and among those in their seventies such as myself.


University and College Education is an Election Issue
Filed under: Education — ccpamb @ 10:44 am
Like other public services, universities and colleges in Manitoba went through tough times in the 1990s. Federal and provincial funding cuts paved the way for a 130% increase in tuition fees, declining enrolment, the elimination of bursaries and grants for students, faculty and staff strikes, and deteriorating infrastructure.

In 1999, the provincial government changed direction.

Tuition fees were reduced by ten percent and have been frozen ever since. Students in Manitoba now pay the third-lowest tuition fees in Canada. There are other benefits: the freeze has contributed to huge enrolment increases (35 percent since 2000) and provincial grants to universities and colleges have risen by nearly 60% under the freeze.
However, there is no denying that more funding increases are required both to make education more affordable and end the legacy of the 1990s-$7 billion in federal funding cuts to transfers for education and training.

Federal cash transfers to Manitoba made up only 15 percent of funding for post-secondary education in 2005, compared to 25 percent in 1993. Provincial funding increases have helped prevent further decay, but these pale in comparison to tax cuts. The provincial government must set its priorities straight.

In the absence of a government plan for public universities and colleges, the public debate on post-secondary education is dominated by the privatisation-friendly local press. For example, you may have heard that the tuition fee freeze constitutes a subsidy by low-income Manitobans to the wealthy and that tuition fees are not an important barrier to participation in university and college by low income students. Nothing could be farther from the truth.

Tuition fees and student loan payments punish those who can least afford to pay by privatising the costs of education: the less money you have, the bigger proportion of your income tuition fees make up. That’s why, for every $1000 in tuition fees increases, low-income students are 19 percent less likely to complete their post-secondary education.

While it is true that students from high-income backgrounds are more likely to go to university, high-income earners in Canada pay more taxes over their lifetime. Low-income families pay less tax and benefit more from affordable university and college education, the way it should be.G

Governments allow tuition fees to rise and fund education inadequately because they fail to prioritise a strong public post-secondary education system. They ignore the fact that post-secondary education provides benefits to society as a whole, not just the individual. In Manitoba, where one in four children is Aboriginal, providing access to high quality public education is crucial. Even in narrow economic terms, post-secondary education creates vital social capital, and post-secondary graduates generate most of Canada’s income tax revenue.

A 2006 poll by Viewpoints Research showed that 82 percent of Manitobans agreed or strongly agreed that tuition fee reductions benefit everyone. An equal percentage of middle-income respondents expressed support for the continuation of the tuition fee freeze. In the same poll, nearly half of those polled said that they would be more likely to vote for a party that makes accessible post-secondary education a priority.

But polls don’t mean a thing unless we demonstrate our support for education publicly. Make accessible, well-funded post-secondary education an issue when candidates are at your door!