Housing bubbles always make mortgage books look good
Thanks for Ben McLannahan’s very good Big Read survey of the house price and mortgage debt inflation in Canada (“Canada’s home loans crisis”, February 9). One point needs clarification, however.
Mr. McLannahan writes: “Many also note that mortgage books at the big banks look rock solid.” But this means little, for housing bubbles always make the credit performance of mortgage loans look good. As long as the borrowers can sell the houses for more than they paid, credit losses are minimal. As long as house prices keep rising, the lenders, like the borrowers, are happy. When the house prices ultimately fall, the defaults and losses appear and accelerate rapidly. The resulting contraction of credit makes them fall more.
It is the price of the house that is leveraged. The risk question is always: how much can prices fall? The answer is, more than you think.
Alex J Pollock
Distinguished Senior Fellow,
R Street Institute,
Washington, DC, US