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COVID Supercharges Canadian Housing. Yet CMHC Still Gloomy
DLC Canadian Mortgage Experts • August 13, 2020
Pandemic Triggers Red-Hot Summer Housing Market
We will get the full story on July housing in Canada when the Canadian Real Estate Association releases its July data in the next few days, but local real estate boards have reported a robust July market. Even in Calgary, year-over-year sales have jumped by double digits. Sales in Montreal were up more than 45% y-o-y, while Ottawa and the GTA were also very strong. Out west, Vancouver and other hot spots in BC saw the results of pent up activity, from both homebuyers and sellers, that had been accumulating over the past year.
Remember, had it not been for the pandemic, a record spring sales season was in the cards. The lockdown postponed that strength, with sales jumping sharply in May, June and July. Supply continues to remain limited relative to demand, and the Bank of Canada is looking towards housing as a leading sector in the recovery.
Record-low interest rates have boosted affordability everywhere. The Bank of Canada has made it clear that interest rates will remain low for an extended period. Mortgage rates have fallen, as have interest rates on home equity lines of credit. Even five of the Big Six banks have cut their advertised 5-year fixed mortgage rates (posted rates) by about 15 basis points to 4.79%.
These rates have been very sticky on the downside, as banks are reluctant to cut posted rates, which are is used to calculate the penalty for breaking a mortgage. Indeed, the gap between the posted rate and the 5-year government of Canada bond yield is historically wide. So is the gap between posted rates and actual contract mortgage rates at the very same banks.
The Bank of Canada posted rate is the qualifying rate for the mortgage stress test for insured and uninsured mortgages at the federally-regulated lenders--the so-called B-20 rule. That qualifying rate is set to fall from its current level of 4.94% to 4.79% later today when the central bank is due to update its figure.
Last February, following months of pressure from the real estate industry, the Department of Finance and the federal banking regulator announced they would rejig the "floor" of stress tests that borrowers must pass to qualify for insured and uninsured home loans. Then came COVID-19, and a sweeping government rescue that included regulatory relief for lenders. As part of the response, the change to the stress test, which was planned for April, was suspended indefinitely.
Last month, the Office of the Superintendent of Financial Institutions announced it would "gradually restart" policy work in the fall. Still, it made no mention of resuming consultations on the change to its stress test for uninsured mortgages, a vital component of the regulator's B-20 guideline. If the new rules had been implemented, it is estimated that the qualifying rate floor would be roughly 4.09% rather than the new rate of 4.79%.
Several factors, in addition to low interest rates, have contributed to the housing market surge. Having spent so many months working from home, many people are looking for more space. With a significant number of businesses announcing that telecommuting will be the new normal, at least most of the time, buyers are moving to more remote suburban locations where their dollars buy more space. This has been reflected in the slowdown in the condo market. This is not just a Canadian phenomenon but is evident in the US and parts of Europe as well.
Despite the surprising strength in homebuying during COVID, CMHC continues to blast warnings.
CMHC Wants To Expose The "Dark Economic Underbelly"
Yesterday, Evan Siddall, the CEO at the Canada Mortgage and Housing Corp, published an August 10 letter to the financial industry imploring lenders to "reconsider" offering mortgages to highly leveraged households, saying excessive borrowing will worsen the pain of the coming economic adjustment. Evan Siddall said the Crown corporation had lost market share due to restrictions it imposed on high-risk borrowers earlier this summer. Private mortgage insurers have picked up that business, weakening CMHC's position and threatening the agency's ability to protect the mortgage market in the event of a crisis, he said.
CMHC continues to project that house prices will fall later this year, and next, "once government income supports unwind, bankruptcies increase and unemployment starts to bite." A highlighted sentence in the letter says, "We don't think our national mortgage insurance regime should be used to help people buy homes with negative equity. But by offering 95 percent loan-to-value mortgages subject to a 4 percent capitalized insurance fee in the midst of an economic calamity, that's what insurance providers are doing." Siddall, who steps down from his position at the end of the year, goes on to say that we risk exposing too many people to foreclosure.
CMHC announced in June it would narrow eligibility criteria to require higher credit scores and lower debt burdens to qualify for a mortgage. The move, which took effect on July 1, was intended to protect new home buyers from falling prices and reduce taxpayer risk to any market correction.
"We have sustained a reduction in our market share to promote a more competitive marketplace for your benefit,” Siddall said in the letter. “However, we are approaching a level of minimum market share that we require to be able to protect the mortgage market in times of crisis. We require your support to prevent further erosion of our market presence.”
CMHC’s private-sector competitors, Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., opted not to follow along with the rule changes and have increased their market share, as a result, said Siddall.
Siddall concluded with two requests for lenders: “We would hope you would reconsider highly leveraged household lending. Please put our country’s long-term outlook ahead of short-term profitability. Second, please don’t aggravate the impact by undermining CMHC’s market presence unnecessarily.”
CMHC’s ability to respond effectively in a crisis will be weakened if its market share deteriorates significantly further, he said. “If you want us in wartime, please support us in peacetime.”
This article was written by Dr Sherry Cooper, DLC's chief economist.
RECENT POSTS
Did you know there’s a program that allows you to use your RRSP to help come up with your downpayment to buy a home? It’s called the Home Buyer’s Plan (or HBP for short), and it’s made possible by the government of Canada. While the program is pretty straightforward, there are a few things you need to know. Your first home (with some exceptions) To qualify, you need to be buying your first home. However, when you look into the fine print, you find that technically, you must not have owned a home in the last four years or have lived in a house that your spouse owned in the previous four years. Another exception is for those with a disability or those helping someone with a disability. In this case, you can withdraw from an RRSP for a home purchase at any time. You have to pay back the RRSP You have 15 years to pay back the RRSP, and you start the second year after the withdrawal. While you won’t pay any tax on this particular withdrawal, it does come with some conditions. You’ll have to pay back the total amount you withdrew over 15 years. The CRA will send you an HBP Statement of Account every year to advise how much you owe the RRSP that year. Your repayments will not count as contributions as you’ve already received the tax break from those funds. Access to funds The funds you withdraw from the RRSP must have been there for at least 90 days. You can still technically withdraw the money from your RRSP and use it for your down-payment, but it won’t be tax-deductible and won’t be part of the HBP. You can access up to $35,000 individually or $70,00 per couple through the HBP. Please connect anytime if you’d like to know more about the HBP and how it could work for you as you plan your downpayment. It would be a pleasure to work with you.
If you’re new to the home buying process, it’s easy to get confused by some of the terms used. The purpose of this article is to clear up any confusion between the deposit and downpayment. What is a deposit? The deposit is the money included with a purchase contract as a sign of good faith when you offer to purchase a property. It’s the “consideration” that helps make up the contract and binds you to the agreement. Typically, you include a certified cheque or a bank draft that your real estate brokerage holds while negotiations are finalized when you offer to purchase a property. If your offer is accepted, your deposit is held in your Realtor’s trust account. If your offer is accepted and you commit to buying the property, your deposit is transferred to the lawyer’s trust account and included in your downpayment. If you aren’t able to reach an agreement, the deposit is refunded to you. However, if you commit to buying the property and don’t complete the transaction, your deposit could be forfeit to the seller. Your deposit goes ahead of the downpayment but makes up part of the downpayment. The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there is no predefined or standard amount. Instead, it’s best to discuss this with your real estate professional as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance of having your offer accepted in a competitive situation. It also puts you on the hook for more if something changes down the line and you cannot complete the purchase. What is a downpayment? Your downpayment refers to the initial payment you make when buying a property through mortgage financing. In Canada, the minimum downpayment amount is 5%, as lenders can only lend up to 95% of the property’s value. Securing mortgage financing with anything less than 20% down is only made possible through mortgage default insurance. You can source your downpayment from your resources, the sale of a property, an RRSP, a gift from a family member, or borrowed funds. Example scenario Let’s say that you are looking to purchase a property worth $400k. You’re planning on making a downpayment of 10% or $40k. When you make the initial offer to buy the property, you put forward $10k as a deposit your real estate brokerage holds in their trust account. If everything checks out with the home inspection and you’re satisfied with financing, you can remove all conditions. Your $10k deposit is transferred to the lawyer’s trust account, where will add the remaining $30k for the downpayment. With your $40k downpayment made, once you sign the mortgage documents and cover the legal and closing costs, the lender will forward the remaining 90% in the form of a mortgage registered to your title, and you have officially purchased the property! If you have any questions about the difference between the deposit and the downpayment or any other mortgage terms, please connect anytime. It would be a pleasure to work with you.
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