User talk:Robgn27/sandbox
How did the Canadian housing bubble form and how did the Canadian government implement policies to prevent the Canadian housing bubble from bursting during the global financial crisis of 2008?
The Canadian housing bubble was created through a series of events involving the Canadian government and private firms leading up to the global financial crisis. Although many country’s housing bubbles burst during the global financial crisis, the Canadian housing bubble actually grew because of government policy and several other factors during and after the global financial crisis.
Intro
Much of the media has portrayed the Canadian financial sector to be relatively safe and low risk with high standards. This stereotype may have been true but only up until the early 2000’s. During the early 2000’s U.S. firms began to enter the Canadian mortgage market by offering subprime and other risky loans that were previously unavailable in Canada. At first the U.S. firms were relatively unsuccessful in the Canadian mortgage market because the U.S. firms could not get insurance on the loans they made. The only firm at this time that insured loans in Canada was a federally owned company that was very strict about insuring loans and had high standards for the loans it did insure.
2006 - Canadian housing bubble begins to form
In 2006 a newly elected Canadian government lobbied by U.S. firms, mainly American Insurance Group, came into office. U.S. firms lobbied the Canadian government with the goals of loosening the regulations on Canadian mortgages and allowing more mortgage insurance firms to enter the Canadian market. These goals were accomplished when the Canadian government made reforms to the National Housing Act of Canada. With this change in Canadian policy came rapid growth in subprime loans, mortgage backed securities, and interest only mortgages because mortgage firms could finally insure riskier loans that previously would not have been insured.
2008 - The global financial crisis
In 2008 the global financial crisis strikes with the collapse of the U.S. housing market followed by similar results in European countries. These housing markets crashed because of riskier mortgage practices that have been seen to be the center of housing bubbles in many countries during the early to mid 2000’s. Countries that had housing bubbles, such as the U.S., burst during the global financial crisis of 2008, however, the Canadian housing bubble did not burst even though it was on a similar trajectory to other countries that experienced economic downturn. The Canadian housing index did experience some turbulence, an 11% decrease, when the global financial crisis initially began. However, quick action from the Canadian government prevented their housing market from slipping further.
2008 - Canadian government policy regarding the Canadian housing bubble
With fear of following the direction of the U.S. economy, the Canadian government implemented policies in hopes of preventing the Canadian housing bubble from bursting. These policies acted as a temporary solution to the problem and were created without general public knowledge. To prevent the Canadian housing bubble from popping, the Canadian government issued $32 billion in bailouts. The Canadian government realized this would only be a temporary solution to the problem and continued with aggressive policy to prevent Canada’s housing bubble from bursting.
The Canadian government decided the best way to prevent the Canadian housing bubble from bursting would be to implement policy that would stimulate the Canadian housing bubble to continue to grow through the global financial crisis. The Canadian government achieved this by continuing to purchase mortgage backed securities, providing large bailouts, and through having 0% interest on loans from the Canadian government. These actions of the Canadian government successfully prevented a liquidity crisis and prevented the Canadian housing bubble from bursting.
2010 - Growth in the Canadian housing market
In 2010 the Canadian housing index set a record high of 412.05 points. At this time housing indexes in countries whose housing bubble burst were approaching low points. For example, the U.S. housing index was at 300 points compared to 380 points preceding the global financial crisis. This record high in the Canadian housing index proved the success of the Canadian government in implementing policy to continue the growth of the Canadian housing bubble.
2010 - 2016 - Current factors influencing the Canadian housing bubble
The Canadian housing bubble has continued in growth due to multiple current factors. Two of the major current factors are foreign participation and recent Canadian government policy.
Foreign participation in the Canadian housing market has influenced the Canadian housing bubble to continue to grow. Foreign participation in the Canadian housing market has mainly occurred in Canada’s large cities. This is the argument presented by Canada’s national housing agency as an explanation for the continued growth of the Canadian housing bubble. Canada’s national housing agency believes that foreign participation in the Canadian housing market increases demand for real estate which results in prices increasing and when the housing market experiences turmoil foreign participants have an easier time walking away from the Canadian housing market because they do not live their. Although this sounds like a reasonable argument, other firms such as B.C. Real Estate Association, believe that Canada’s national housing agency does not have the sufficient data to back up their claim. The B.C. Real Estate Association instead believes that prices in the Canadian housing market are being driven by land scarcity and densification policies.
The other current factor influencing growth in the Canadian housing market is government policies. One of these government policies allows first time home buyers to withdraw more money from their RRSP accounts for a down payment than what was previously allowed. This will encourage more Canadian citizens to purchase homes and will allow them to purchase homes they previously may not have been able to afford, which will increase demand for homes and result in increasing prices. Another government policy that will encourage continued spending in the real estate sector of the Canadian economy is a tax credit incentive for homeowners who renovate their homes. These policies are only encouraging spending in an already over-valued market.
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