The intervention of the Canadian government in the mortgage market. Canada's real estate market is currently overvalued. This situation has grown in concert with a marked increase in Canadian debt and an excessive expansion of mortgage loans. Resolution of this problem will result sooner or later in severe correction of property prices, which will likely be followed by a recession. It should be noted that there will not be so many Canadians working in the construction industry and related sectors. In addition, people have used the added value of their homes to subscribe to credit lines that allow them to increase their consumption on credit and use their homes like credit cards. In his view, there is no doubt that Canada's mortgage lending market has been deeply distorted by government intervention, allowing banks to lower their cost of funds and, as a result, reduce interest rates that can be achieved. they offer.
Mr Reucassel estimates, based on the experience of Australia, that the involvement of CMHC will have a 0.75% impact on the cost of funds for Canadian banks, which is huge. So, if Canada had to pay the real market interest rate, they would not be in debt and the real estate market would be underestimated. CMHC is involved in two ways in the real estate market. First, it provides mortgage insurance to individuals who can not provide at least 20% of home value. Second, banks can insure a portion of their loan portfolio for securitization or mortgage-protected bonds. This allows them to free up capital, increase liquidity, and lower their funding costs.
The following two charts show mortgage-backed securities that CMHC is guaranteed and cover bond issues by Canadian banks based on the insured mortgage port of CMHC. I would also add that Canada's credit market has been increasingly distorted by the Bank of Canada's monetary policy, which keeps interest rates much lower than it should be. However, I understand that Mr. Reucassel did not want to go into this field, being a bank employee himself.