Thank you, Mr. Chair, and thank you to the committee for inviting the Canadian Mortgage Brokers Association to speak about the current situation in the housing and mortgage finance industry in Canada.
As mortgage brokers, our members are uniquely positioned to offer insight into the industry. Our footprint in Canada as mortgage brokers is very extensive. As an example, mortgage brokers fund over $70 billion a year in mortgages. That's the level of activity.
It's all types of mortgages including residential mortgages, commercial mortgages, development and construction mortgages, refinancing, debt consolidation, apartment buildings, and rental properties. It's very extensive. In fact, over 55% of first-time homebuyers use a mortgage broker. Imagine a mortgage industry without mortgage brokers.
We also distribute funds for alternative sources of financing, such as mortgage investment corporations and private mortgages.
We have a level of knowledge we're very happy to share. We understand the unique challenges Canadians face when it comes to home ownership. Our members live and breathe these challenges with these homeowners and potential homeowners, and this happens throughout the country.
We like to say that mortgage brokers are at the tip of the spear when it comes to home ownership because we make the dream of home ownership a reality for many people. When it comes to the issue of home ownership cost, that tip of the spear is the culmination of many costs that result in an end price for a home.
There are many factors that determine pricing, and many people seem to be alarmed at what is perceived as the high cost of home ownership, which also goes into the high cost of rent, because somebody has to own those properties. Ultimately these costs have to be paid, and that's why we are at the tip.
For most Canadians this is paid for by taking out a mortgage. It's that simple. As costs increase, your mortgage amount will increase as well.
As I have said, many observers and Canadians are alarmed at the high costs they face, or perceived high mortgage amount that's required to own a home. It's very important that we understand those costs, and we've submitted a letter to the committee. There are many factors to those costs.
We know that there is always the land cost, but when you look at development, there are changes in the building code every year. This increases costs. We don't build the same type of home we built 20, 30, or 40 years ago. We're always building a better product. That costs money. That may result in a higher mortgage amount for somebody.
Municipal fees are also a factor. As mortgage brokers, we are involved in development financing. We see lots of different costs in different municipalities. These costs are development cost charges, school fees, land acquisition fees, and land dedication fees. All of this actually adds to cost.
Municipal by-laws also add to cost. There's a requirement, as I said, for land dedication.
We're looking for livable community concepts. Urban planning professionals build better communities. These all cost money, and they culminate in the end price of homes for Canadians.
There's also a slow and frustrating development process that our developer clients see. They have to pay for that. Holding property costs money. They take out mortgages. Their interest costs accumulate, and they have to pass that on to the end purchaser.
We understand how these costs are manifested, and we are at the end, financing Canadians.
What we like to say is that there are also finance costs involved. We've seen recent changes to CMHC's insurance premiums. In our letter, we've actually submitted some examples, and we can refer to that in the question period, but in some cases now, the insurance premium is as much as the down payment that a homeowner is asked to put down.
Five per cent is the minimum down payment required. As an example, on a $500,000 purchase, $25,000 is the down payment. In an extreme case, you would pay about $22,000 in insurance costs. That's a very onerous cost at the end of the line.
The Canadian Mortgage Brokers Association would like to offer our consultation services and let you know that we are experts. Before changes are made to mortgage policy, we'd love to be consulted and provide the insight that we as professionals would love to impart to you.
The housing sector, which includes new construction, residential renovation, repairs, and maintenance, is an important sector. In 2015, the economic value of this sector in Canada was over $133 billion, or close to 7% of the GDP. In Quebec, its value was $26 billion, or close to 8% of its GDP.
Our sector creates many good jobs. In 2013, for example, renovation and new construction helped create more than 172,000 full-time jobs in Quebec.
The federal government also benefits in terms of tax revenues. A $270,000 house sold in Quebec, for example, yields $16,300 in tax and incidental revenues, from construction to the time of sale. A $35,000 renovation contract yields close to $2,900 in tax revenues for the federal government.
As to the real estate market, despite relative market stability in the past few years, new construction has dropped off.
In Quebec, there were close to 39,000 housing starts in 2016, a 2.7% increase over 2015. In the past four years in Quebec, housing starts have levelled off at about 38,000.
While these numbers are positive, over a longer period, housing starts have decreased by 33% since the peak in 2004. Total housing starts have fallen off from close to 58,500 in 2004 to close to 39,000 in 2016. Roughly 1,800 fewer homes are built in Quebec every year. This slowdown can in large part be attributed to a drop in the number of households in Quebec. There are other factors, however, which we will discuss.
The thing that must be understood and that we wish to emphasize here are the benefits associated with becoming a home owner and acquiring one's own home. Home ownership is a way for households to build personal wealth. Home owners have higher net worth than renters. Moreover, once home owners retire, they enjoy benefits representing between 10% and 15% of their income.
Quebec has a lower rate of home ownership, however. Home ownership is at 61% of households in the province, as compared to 69% for Canada as a whole.
The question we are asking today is how can we help families become home owners? We must reduce the main barrier to making a down payment, which is an obstacle for seven out of 10 young people, according to a survey we conducted.
This survey also showed that it takes young people about eight years to save enough for a down payment on their first home. A few years ago, the Government of Canada decided to protect the financial market, taxpayers, and households by tightening mortgage insurance rules. As you know, nine restrictions on lenders and mortgage insurers have been announced since 2008 in order to tighten access to mortgage insurance.
The most recent measure, announced on October 3, 2016, will have major repercussions on the real estate market in Quebec. Access will be more difficult for 74,000 households, the number of housing starts could drop by close to 6,900 in 2017, and home resales could fall by 7%.
These decisions have had a significant impact in Quebec, which is already lagging in home ownership.
I will now give the floor to my colleague, François Vincent.
We would now like to draw your attention to the four recommendations we make in our brief. These four recommendations could help the government achieve its objectives of preserving the integrity of the financial market, protecting households from excessive debt, and containing the overheating of the real estate market, while also providing the missing piece that would enable people to purchase their first home.
We hope the committee will formally recommend them and that government MPs will present them convincingly to the Minister of Finance in view of the upcoming budget.
First, we suggest that an intergenerational home buyer's plan be created to allow parents to draw on their RRSPs so they can help their child with a down payment on their first home. This withdrawal would be repaid according to the applicable conditions of the home buyer's plan.
There are many parents who would like to help their child make a down payment on a home, but they do not necessarily have tens of thousands of dollars in their chequing accounts. By drawing on their RRSP, they could help their child purchase a home.
Moreover, these additional funds could decrease the amount borrowed and reduce the lender's risk. There would be a lot more down payments of 20% of the property's value, meaning that the borrower would not need mortgage insurance.
Such a measure, which would not cost the Government of Canada anything, would mean that the regional real estate markets that are not in the overheated areas of Vancouver and Toronto would not suffer from the recent tightening of mortgage rules, thereby preventing the very alarming figures cited by my colleague Mr. Lambert from becoming a reality.
Secondly, we would like to recommend ...
Thank you, Mr. Chairman and committee.
Thank you, fellow witnesses.
I've been a practising mortgage broker since 1999 in the Vancouver area. I have a lending background going back to 1988. Our company serves both B.C. and Alberta. We have 130 mortgage brokers on our team, and we did 3,800 mortgages last year for a total of $1.36 billion.
Of the changes enacted on October 3 by the , the one that impacted Canadians the most severely was bringing consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test.
Page 36 of the Liberal Party of Canada's platform piece states, “Government should base its policies on facts, not make up facts to suit a preferred policy. Common sense, good policy, and evidence about what works should guide the decisions that government makes.”
The government did nothing to find out from those within the industry the long-term effects of these changes. By making the changes, they've impacted a large number of Canadians, not just first-time buyers but those already in their homes. By rushing these changes through without researching their impact, they've damaged the competitive nature of the industry and skewed it in favour of one group over others. This will result in more expensive lending for all Canadians.
As an example of this, the X family who live in North Vancouver have a mortgage for $250,000 that is now coming up for renewal. Since their home is now assessed at over one million dollars, they are now considered uninsurable and must pay a higher rate on any mortgage term.
Another example is that of Mr. A, who is separated from his wife and has been working out a separation agreement since last spring. He had planned to buy her out of the matrimonial home in the Kootenays but no longer qualifies, and now the home must be sold.
We, of course, have had a number of first-time buyers who have tried to save the down payment needed to enter the market and buy their first home. Many of those reduced their expectations of buying a house and are instead focused on townhouses and condos. With payments forced to be made for over 25 years, their buying power has been further diminished.
Our housing industry in Canada is sound. We survived the meltdown of 2007. We have had a positive impact on the economy. CMHC is a money-maker for the government and is safer than ever. These changes were not needed and will only cause harm to the majority of Canadians.
I recommend the following changes be made to the criteria for insured and non-insured mortgages: allow 30-year amortizations, stop attempting to restrict investment in rental properties, and remove the limit on insurable mortgage size, which is currently one million dollars.
I welcome your questions. Thank you.
Thank you very much, Mr. Chair, and thank you for the opportunity to present to the committee today.
My name is Paul Taylor. I'm president and CEO of Mortgage Professionals Canada, Canada's mortgage industry association representing 11,500 individuals and over 1,000 companies. We include mortgage brokers, mortgage lenders, mortgage insurers, and service industry providers.
The mortgage broker channel we represent originates 33% of all mortgages in Canada and over 50% of mortgages for first-time homebuyers, which equates to approximately 80 billion dollars' worth of economic activity annually. Canadians are also increasingly choosing mortgage brokers to obtain a mortgage. Our most recent data shows that, year over year, mortgage brokers have been used 9.6% more this year than last.
Not all the traditional bank products are available through the mortgage broker channel, which is an important distinction to make. The recent changes are having a cumulative negative impact on the mortgage marketplace and ultimately on the Canadian consumer. In light of this, we're asking for some slight amendments to portfolio insurance, which I will get to shortly.
As the committee is probably very well aware, as of November 30, all mortgages submitted for inclusion in portfolio insurance are now subjected to the same stress test as high-ratio insured mortgages and many important categories have also been made ineligible. These changes disproportionately impact non-traditional bank lenders who rely on the portfolio insurance mechanism for liquidity and ease of access to capital.
As an example of the impact of these changes, Genworth Canada estimates that if submitted today approximately one-third of their total volume of mortgage insurance written in October 2016 would no longer be eligible.
Banks can take loans onto their balance sheets. Smaller lenders do not have the same capital volumes to effectively compete. As a result, all ineligible portfolio insurance mortgage products now have to be financed by the smaller lenders through other private capital mechanisms, which makes their products more costly for consumers and therefore uncompetitive.
From a policy perspective, if the intent of the stress test is to protect highly leveraged buyers from themselves, then all consumers should be subject to the stress test to ensure a fair marketplace. OSFI could achieve this by amending the required underwriting guidelines.
Also setting the stress test at the Bank of Canada's current five-year rate serves to imply that the government's intention was to favour the big banks over smaller lenders. This rate is set by the mode of the big five banks' posted rates, which in effect allows the banks to control the rate that creates their competitive advantage.
An important contextual note is that while many of the non-traditional bank lenders do not fall within OSFI's regulatory purview, it would be incorrect to suggest they are not regulated. Each province has its own regulations related to mortgage lending and non-traditional bank lenders statistically originate mortgage loans with equivalent or slightly better default rates than the banks. For Canadian mortgage consumers, non-traditional bank lenders play an invaluable and necessary role in a competitive marketplace.
There are some significant negative impacts on price of these changes. As of January 1, the average cost for a conventional mortgage fund has increased by 25 basis points; in real dollars, that's about $2,300 over the five-year term. To the full amortization period of the mortgage, it's about $10,400.
In addition to these additional costs, mortgage insurers are increasing their insurance premiums on non-conventional mortgages for the third time in three years. This is due to OSFI's newly released capital adequacy guidelines and the premiums in some loan-to-value categories are jumping by more than a full percentage point of the value of the mortgage. These, of course, will be costs passed on to the ultimate consumer.
The stress test also creates a reduction in the purchasing power for many Canadians, which some of the other panellists have discussed. We have some regional issues as well that were created by them. Many will be first-time buyers.
Our chief economist, Will Dunning, tells us the stress test will mean homebuyers will have their calculated total debt service ratios increased by 5 to 7.5 percentage points, which is going to have a material impact on their purchasing power without really changing any of their specific details. The spin-off impacts of a reduction in purchasing power for the middle class could have the unintended consequence of creating the scenario that these policies aim to prevent, which is a national debt crisis caused by a significant economic decline.
The new capital requirements from OSFI also require insurers to look at two new characteristics of a loan to determine how much capital they need to hold on hand to portfolio insure it: credit scoring and geography.
We're concerned that these changes create regional price and access disparities that will disproportionately impact middle-class Canadians in areas deemed high risk. The proposal to introduce risk sharing into the market would also cause major price and access disparities. While Canada has enjoyed historically low default rates, somewhere below one-third of 1%—I think it was 0.28% on Monday—data has always demonstrated that job losses are the number one trigger for mortgage defaults.
Under a risk-sharing structure, as regional economies suffer downturns, local mortgage costs are going to increase proportionately. We would suggest that this is the exact opposite of the result the government would like to see, as opposed to the social mechanism that CMHC and the securitization program is intended to create.
In conclusion, the announced changes negatively affect the mortgage broker channel as a whole, and Canadian consumers have been more and more inclined to use the services of a broker to provide choice, advocacy, and support, and to assist in the technical requirements of mortgage qualification. Placing competitive disadvantages then on the non-traditional bank lenders will adversely affect this segment of the Canadian mortgage marketplace, which consumers clearly are voting for with their purchasing habits.
We have five recommendations that we would like the committee to consider to help mitigate the effects of these changes.
First, suspend all regulatory measures not yet implemented.
Second, adjust the November 30 change to allow for refinanced mortgages to be included again in portfolio insurance. If an 80% loan-to-value ratio is unacceptable, please consider reducing the threshold to 75% rather than removing the eligibility of these products entirely.
Third, the government should reconsider the increased capital reserve requirements implemented in January for insured mortgages.
Fourth, we recommend that a review be conducted into the long-term impact of regional-based pricing on the Canadian economy as a whole, and the potential additional harmful effects on already strained regional economies.
Finally, please uncouple the stress-test rate from the big five banks’ posted rates. Use an independent mechanism to determine the rate and require its use to qualify all mortgages, not just those insured.
Thank you very much, indeed.
Welcome, everyone. You'll have to excuse the delay because of the vote. It seems to happen here once we start session, but thank you for your safe travels here.
I've been spending quite a bit of time reading all the material related to the housing market in Canada. It's a daily topic for my constituents. We get emails on.... The latest email I received was from an individual who wanted to buy a house in Waterloo for his daughter. The listed price of the house was $379,000, and it went for $500,000.
Closer to home, when I see houses selling in our subdivision for $1.4 million or $1.5 million, I kind of scratch my head when those houses were originally listed in 2007 for about $480,000. There is something going on, whether it's the supply or demand side that we need to look at.
When I look at all the changes that have taken place within the Canadian housing market, the price increases, the flow of the demographic slide, the flow of immigrants, newcomers, and Canadian citizens moving to the GTA, for example, the area that I reside in, there are a lot of natural outcomes. One of the outcomes has been a very large increase in indebtedness of individuals. It behooves any government, including my colleagues on the other side when they were in power, to make sure that changes are made to ensure the system does not go off-kilter, that we do not experience something akin to what happened in the United States.
In Canada, we have a very unique system where the government backstops a large portion of the market, i.e. the high-ratio portion or what's called less than 20% down payment. Going through all the changes that have been made, some of them are quite prudent. There's a structure in place in the housing market on mortgage generation, which were changes that were made, and I would argue that a lot of the changes are actually quite prudent and that we also have to incorporate regional differences.
My question is coming from the Bank of Canada's FSR report in December. Looking at the increase of indebtedness levels, I can turn to page 5 of the report. It says, “The proportion of borrowers with high mortgage debt is increasing in many cities”.
Looking at the trends, isn't it prudent for any government, when CMHC is effectively backstopped by the taxpayers of Canada, to implement measures designed to improve the quality of indebtedness for borrowers going forward?
I'll put that out there because I think it is prudent for any government, be it on the Liberal side or in the past on the Conservative side. Would you take 30 seconds each to answer that, please?
I'd like to start with that.
I keep hearing about this income-to-debt ratio. For me, that is a red herring.
There are two types of debt in this country. There's good debt and there's bad debt. First off, who knows how that ratio is calculated? I was in a meeting with the CMHC general manager for Atlantic Canada last week. I asked her that question. Frankly, she could not answer it. Her economist took a stab at it. We're still not sure in Atlantic Canada how that ratio is come to.
It's important to recognize there are two types of debt, good debt and bad debt. A housing payment is a good debt as it is a debt for an asset that not only appreciates in value but as you pay down that debt, it creates equity that is tangible. It provides shelter, and it builds net worth when there is a principal or balance reduction.
There are multiple factors considered when granting mortgage financing. Debt ratio, income, assets, income to assets, debt to assets, credit repayment history, credit utilization, income stability, income source, down payment, location, property type, and other qualifying criteria, i.e. the 3% rule on revolving credit. That is a good debt. It goes through a number of checks and balances to ensure that it is property administered and that it is on an asset that appreciates.
Thank you all for being here.
I'm going to make a couple of comments and then ask everyone, because there are four witnesses, to make a general response.
I come from Calgary. As you are well aware, the economy in Alberta has not been good for the last couple of years now and is probably getting worse. In speaking with a home builder quite recently, all through the downturn in oil prices, they were still building and selling homes. He said as a result of the move last fall, the new home construction in Calgary has effectively dried up. I would like you to comment on that.
Secondly, I would like you to expand a bit on the one-size-fits-all approach. Again, you mentioned Quebec. I'm from Alberta. It seems as though Canadians across the country are being penalized because of two hot markets, one in Vancouver and one in Toronto. I would like you to comment on that.
The third thing is that we had a group of witnesses here the other day. To an individual, they swore on a bible that they had not had any contact with federal officials asking for advice on what the right approach is. I would like you to comment on whether that is applicable to each one of you.
I'll leave all of those with you.
Likewise, to echo the comments of our two colleagues here, we were not consulted, although we did raise these issues in early November with the staff at the 's office.
I'll pick up very specifically on your point about the effect there. In Quebec, 40% of the buyers of either existing or new houses are first-time homebuyers. The issue here is.... Yes, it has an impact on housing starts, but it also has an impact on the resale market and the home improvement market. It's all a chain, because those existing buyers willing to sell their house to move into a condo or a retirement home have a house for sale, to be purchased by either another experienced homeowner or a new homeowner. It's a chain, and all the parts are linked together. It has an impact on all the dimensions.
One of the perverse effects of this new policy is that those who are on the brink of buying a house, with just enough down payment saved, are not qualified anymore. They're going to delay purchasing that house. They're going to purchase a cheaper house or locate somewhere else. They're going to call their aunt, dad, or uncle to raise more money, or they're going to remain a tenant, keep that money, and now with that $10,000, $15,000, or $20,000 they have saved, they're going to buy a truck, a boat, or something and get some of what was called earlier a “bad debt”.
You end up in a situation where people will knock at the bank's door not to borrow for a mortgage but to get some lending for more consumption—a trip to the south or a cruise, or whatever. It's consumption-related indebtedness, which is not backed by an asset that appreciates and that you pay down, like a house. That's the perverse effect, to pick up on what Mr. Sorbara was raising earlier.
As far as the Canadian Mortgage Brokers Association is concerned, we were not consulted on any changes. As I mentioned in my preamble, we'd like to be consulted.
As far as regional policy goes.... I'm going to date myself a bit here. I started as a mortgage broker in 1988 and there was actually a bisected policy. In those days, there was a $125,000 rule and a $175,000 rule. If you were in an outlying area, it actually was the opposite effect. You could put a minimum down payment to a maximum of $125,000, and in a larger city centre you could go up to $175,000. It has worked in the past.
When some of these changes came about, our association sent a letter to the 's office with some recommendations. It's in our submission. One of the basic ideas there was, how much is enough? How much is a lot of debt? We always talk about “a lot of debt”. We've recommended that maybe we should look at a number so that below, say, $500,000, we could actually qualify mortgages on a discounted rate, because now you have to go to the benchmark rate.
It has affected regions. We are taking issues that are maybe of concern in our primary centres like Toronto and Vancouver and putting these policies across the country. It's not really that fair. This idea of regional policies can work and has worked in the past.
Not specifically. I can, however, make two comments based on my limited knowledge of tax matters.
First, contributions that are not repaid as they should be over 15 years, a period that begins two years after the funds are withdrawn, are added to the person's income, and that amount is taxable.
Secondly, the tax rules on capital gains exemptions have been tightened up recently. It is also very clear that taxpayers will have to declare property sales in their tax returns. This is something new. The capital gains exemption rules for assets other than a principal residence apply and are already in force.
As to a person who owns a principal residence and another residence that is deemed a secondary residence, the current rules already limit possible gains, and the government can tax that person under the current rules.
There are of course always financial arrangements. There are tax specialists and professionals who can be very creative in order to achieve certain things, while fully complying with the spirit of the law. Our suggestion, however, is intended to help children access funds that their parents have already accumulated, but that are not available in a chequing account.
Lady and gentlemen, we welcome you to the House of Commons. We are very pleased to see you all.
But I can't say that I'm very proud of what we heard a few minutes ago. It's totally unacceptable and unbelievable that this government took such an important decision without consulting any one of you, and you're not the first. We have heard some other witnesses before who said exactly the same thing. This is totally unacceptable, but at least, thanks to this committee, you can express yourself now.
My question is of course for Mr. Lambert and Mr. Vincent.
Welcome and thank you very much for being here today.
You made some points that truly surprised me. You said you are expecting real estate sales to drop by 7% and that 40% of your clients are first-time buyers. That places a great deal of pressure on the government as regards the policy it abruptly announced. I say “abruptly” since there was no prior consultation.
On the other hand, though, you did offer some potential solutions.
You spoke for instance of an intergenerational RRSP that would allow parents to help their children. At the risk of dating myself, I am very proud to have two children in their twenties who are starting out in life; using my RRSP as leverage, I am able to help them with their first purchase. Your idea of an intergenerational RRSP is very promising.
You also talked about helping first-time buyers by increasing their GST rebate and offering tax credits.
I have another question. I have to leave for another appointment shortly and will give the floor to my friend Mr. Albas. Please do not take my departure personally.
I would like you to explain your four proposals in greater detail. You had the time to explain the intergenerational RRSP, but have you costed out the three other measures? What is your estimate of the cost of the assistance that could be provided to first-time buyers if we follow through on your recommendations?
I think I can get to the root of this.
There are some lenders who will specifically focus on or target borrowers that have less appealing credit histories. They might work in a marketplace where they will offer a higher standard mortgage interest rate because the risk of default for those clients is different. They are also generally privately funded, though, so that is a separate category of lender, if you will, within our membership.
There's not an awful lot of difference most of the time between the large balance sheet lenders' desired clientele and some of the smaller...I'll call them “residential specialist lenders” within our association.
Each of the large and the small will use the securitization program to a degree. Each of them occasionally will be finding additional sources of capital, whether it's their own balance sheet or through other mechanisms within the marketplace. The big difference between the two and what will cause a reduction in competition in the marketplace is that, because the smaller lenders are relying more upon the securitization mechanism, once that's removed or there's significant reduction of the risks that are eligible for that, the origination of mortgages for those folks is almost impossible without having to find alternate sources of capital, which are more expensive.
Very simply here, when you bundle mortgages into an investment mechanism that's a bond, if it's insured, then the risk for you in the market is quite small. If it's uninsured, the investors require a higher risk premium and, of course, the mortgage holder is ultimately paying for that with the interest rate that they're charged.
Thank you so much, Mr. Chair.
Thank you all for coming.
I heard the conversation around good debt and bad debt, and I get it. However, isn't there the factor, whether you have an individual who perhaps has a mortgage that is a little more than they can afford if interest rates go up or a person who has a boat and a mortgage and can't pay both, that ultimately, if you can't afford your debt, whether it's good or bad, you stop paying for it and that, therefore, causes problems within the economy? This notion that if you have good debt, that's all fine, and if you can't afford it, well, it's still considered good debt, versus someone who can't afford their boat payment....
My colleague just said that this hurts the economy. I'm wondering, what would hurt the economy and the housing market more? Would it be telling individuals that if interest rates were to go up, they could only afford this type of mortgage, or allowing them to have whatever mortgage they prefer without stress-testing it to the realities of the economy and the situation right now, and having homes and mortgages being defaulted? That is the option. You tell someone, “You can afford a little less”, or they bite off more than they can chew, and in economic situations mortgages default. How was that experience for the U.S. on people's biggest investment in their homes?
When defaults happened on mortgages, so did value, so all that equity that was discussed was no longer there. Wouldn't that hurt the housing market dramatically if we didn't prepare and protect for risks like that?
I'll take a crack at that.
On this idea of good debt and bad debt, when we lend somebody a mortgage, at that time they follow the stress test. In other words, they qualify. There's always going to be an element of individuals—and it's a small element—who will take their mortgage and everything's good, and maybe they'll buy a boat after. That's after we've actually qualified them. That's going to be a small element.
Your worry is that people take on too much debt. Well, let's look at the great success stories of all Canadians who have bought their first homes. Think of your parents. Think of your grandparents. I haven't heard one easy story about the first home a person has bought. Sometimes they may feel a bit stressed, but are we to say that average Canadians are irresponsible with debt? I don't think they are.
I've been a mortgage broker since 1988, and I've seen nothing but success stories. Have we had some market slowdowns in that period? Yes, we have. The vast majority of people continue to do what they have to do to make their mortgage payments. Say, 25 years ago, when they were 25 years old, it was tough. Today they've paid off that home and they've been able to use that to fund their children's education—
Thank you for having invited me to testify before the committee this afternoon.
I was born and raised in Ottawa, where my father worked as a public servant. It is always a pleasure to come back here.
First National is a prime mortgage lender that underwrites about $23 billion a year of residential and commercial mortgage loans. In addition to being Canada's largest non-bank mortgage lender, with 950 employees across the country, we are also publicly owned and traded on the Toronto Stock Exchange.
We use mortgage brokers to distribute our products, and CMHC securitization programs to raise the capital to fund these mortgages. We have employed leading-edge technology, together with competitive interest rates and a high level of service, to achieve our goals. We do not compete on credit quality. In fact, our credit quality meets or exceeds any lending institution in Canada. We estimate that we have provided about one million Canadians with the financing to enable them to achieve their dream of home ownership.
One of the cornerstones of our business model has been our relationship with the Canada Mortgage and Housing Corporation. CMHC was founded in 1945 to provide funds for housing for soldiers returning from the war. In 1954, CMHC introduced mortgage default insurance, in an effort to provide liquidity to Canadians for home ownership. In addition to CMHC, there are two private sector competitors to CMHC who now serve almost 50% of this market.
In 1987, CMHC introduced NHA MBS, National Housing Act mortgage-backed securities, and then in 2001, the CMB, the Canada mortgage bond program. These securitization programs have allowed pension funds, mutual funds, and other non deposit-taking institutions, both domestic and international, to provide mortgage funding to Canadian homeowners.
Prior to 1987, it was only the large deposit-taking institutions that could raise the large amounts of capital that was necessary to fund the mortgage market. The consumers' choice was quite restricted. The outcome has been to create a bigger playing field in Canada to give Canadians more choices in mortgage financing and to ensure robust competition among lenders to provide lower interest rates. CMHC has been an immense boon to Canadians seeking home ownership through its mortgage insurance and securitization programs.
The Minister of Finance has worked in tandem with CMHC to control and protect the Canadian housing market. Since 2008, pursuant to the credit crisis, the minister has introduced a number of changes to moderate consumer debt through mortgage lending. We have supported these changes.
In October 2016, the minister announced more changes that affect the mortgage industry. These changes included increasing the qualifying rate for five-year mortgages from the mortgage contract rate to the Bank of Canada rate. This change effectively reduces the amount of mortgage that a borrower seeking a five-year mortgage or longer-term mortgage can borrow. The rationale is to ensure that the borrower has the financial resources in the event of rising interest rates at renewal, and at the same time to temper some of the demand in the overheated markets.
While we are supportive of this change, it must be noted that this change only affects insured mortgages, which are less than 30% of the overall market. The remaining 70% of the market, which is uninsured, is not affected. As the average insured mortgage in Canada is $300,000, and mortgages in excess of $1 million cannot be insured, this change will reduce the affordability of housing for first-time homebuyers in the softer markets in the country—the Prairies, Quebec, and Atlantic Canada—and will have a minimal effect on the overheated markets in Vancouver and Toronto.
The most significant and structurally negative change announced in October was the elimination of the availability of mortgage insurance for borrowers who wish to refinance their mortgages. Canadians have always used the equity in their homes to borrow money efficiently, to fund home renovations, children's education, and other financial needs. The new rules significantly restrict the options that these borrowers have and put the clock back 30 years to 1987, when the only choice for these borrowers was to use the large domestic financial institutions. We view this as a retrogressive step, contrary to the broad public policy goal of promoting competitiveness and certainly contrary to CMHC's mandate of helping to house Canadians.
Subsequently, OSFI introduced changes to the capital requirements for mortgage insurers. These changes, effective January 1 of this year, require mortgage insurers to hold substantially more capital, and that's in the area of two to three times more, for a conventional mortgage relative to the capital required to be held by a large, domestic financial institution for exactly the same mortgage.
These changes, by essentially pricing out of the market those lenders who use mortgage insurance and securitization to fund their mortgages, will have the same negative effect on Canadian homeowners, as just discussed.
In summary, we would request that the minister and the superintendent reconsider their decisions to make mortgage refinances ineligible for mortgage insurance and to make no further changes to the rules governing the housing sector until the most recent changes have been absorbed by the marketplace and are fully understood.
I'd be delighted to take your questions.
Good afternoon to the committee members.
My name is Andy Charles. I'm the president and CEO of Canada Guaranty Mortgage Insurance Company. By way of introduction, we are Canada's only 100% Canadian-owned private mortgage default insurer, and since 2010 we have helped over 250,000 Canadians enter their homes. Our company insures Canadians, primarily first-time homebuyers, who place less than 20% down payment on their house purchase.
We take the view that Canada's housing finance system has served our country well, particularly when contrasted to other jurisdictions. Canada has avoided some of the pitfalls other countries have experienced. In part, this is due to conservative underwriting practices in the mortgage industry, strong regulatory oversight, and the avoidance of tax incentives that discourage the reduction of a borrower's mortgage debt. I believe the rest of the world looks at Canada's mortgage insurance structure as a key factor in our overall housing finance stability.
Since 2008, Canada Guaranty has supported the various government interventions that moderated the housing market as being both prudent and well considered. While these interventions have primarily targeted first-time homebuyers, they have served to strengthen Canada's housing market. However, we do believe the impact of the most recent changes, in combination with a new regulatory capital framework, are potentially detrimental to the housing market.
I would like to take a moment to describe today's typical first-time homebuyer for the committee. The average first-time homebuyer ranges in age from 25 to 40, has average household incomes of $80,000 to $100,000. The first-time homebuyer segment now represents just 30% of annual new mortgage volumes as compared to 40% in 2010. They have an average mortgage size of $300,000 and an average credit score of 753. This is a score that demonstrates a very high level of credit worthiness.
In addition, the insured marketplace has a maximum $1 million house purchase limit, a ceiling that generally precludes the first-time homebuyer from participating in the GTA or GVA markets. The headlines one reads about elevated housing market activity in Toronto or Vancouver is not and has not been driven by the first-time homebuyer.
I would like to share more specific observations regarding the recent regulatory changes and our perspective for the future.
The concept of a uniform, homogenous national housing market does not exist in Canada. Accordingly, national policy levers can be problematic when the issues are regional or even city-specific. While Vancouver and Toronto have experienced significant property value increases, Calgary, Edmonton, Montreal, and other markets most certainly have not. This requires local or regional solutions to be considered. Recent housing policy decisions taken by the B.C. government are evidence of a regional solution to a regional issue.
While it is important to reflect on the cumulative impact of regulatory changes over the years on the first-time homebuyer's ability to enter the housing market, we believe the policy changes announced in October 2016 to be the most significant intervention to date. Specifically, the elimination of low-ratio refinance eligibility will reduce choice for borrowers by impacting the competitiveness of Canada's monoline lenders. More borrowers may seek mortgage funding from private lenders representing a higher cost option and with limited regulatory transparency.
The combined implication of the Department of Finance changes of October 2016, followed in short order with the introduction of a new regulatory capital regime, will materially change the housing market dynamics in our view. Before further regulatory initiatives are considered, we need to pause to understand the longer-term impacts.
Recognizing the potential cumulative impact of these changes, we encourage the government to consider the following recommendations.
At this point in time do not proceed with a risk-sharing model. Study the results of the most recent changes before considering any more.
We now anticipate the first-time homebuyer segment share of new originations will drop to just 20% of the marketplace. I would take the view that insured first-time homebuyers are the most regulated segment in today's housing market. They are not the problem, and we take the view that any further targeting of this segment is counterproductive.
Lastly, Canada has indicated plans to welcome 300,000 immigrants to Canada next year, a policy decision that we welcome. The majority of these immigrants will reside in our major markets. We will need to house these new Canadians, and we encourage all levels of government to coordinate their actions to ensure that the necessary housing stock exists to accommodate them.
Thank you for your time.
I am the president of the national association and a builder developer from Toronto. I am joined by Jason Burggraaf from our association's staff here in Ottawa.
Thank you to the committee for undertaking this study.
Simply put, housing matters. It matters to the economy. It matters to our huge industry of small businesses, which supports over a million workers. It matters to Canadians, who recognize home ownership as the cornerstone of attaining the middle class, and it matters that all Canadians have the security of a decent roof over their heads.
We know that there are ways to address stability concerns without causing damage to our industry or the economy. We are concerned that measures to cool markets can easily precipitate economic decline, triggering the very conditions they were intended to safeguard against.
We are also concerned that these measures move CMHC away from its purpose under the National Housing Act—to ensure equal access to mortgage markets for all Canadians.
If such measures lock out otherwise qualified homebuyers, they can cause a downward spiral in local economies. We need to be careful, because residential construction has been a major source of stability for Canada's economy in recent years. Today, residential construction supports over a million jobs, pays $58 billion in wages, and generates over $128 billion in economic activity, including over $41 billion in government revenue.
Home building and renovation are a vital part of every community, large and small, across this country, so effective housing policy is key to supporting Canadians, businesses, and communities in achieving inclusive economic growth. If we are going to support the middle class and those aspiring to join it, we need to ensure that first-time homebuyers and new Canadians have a fair chance to attain the cornerstone of the middle class, and that's home ownership. What's more, the current situation, if not curbed, will lead to a wider and wider gap between those who already have equity stakes and those who do not.
We are facing the potential of the home ownership situation creating social inequity within communities, among regions, and between rural and urban centres. To effectively address the housing challenges, we need to understand what's driving the markets. Why are so many Canadians now having a harder time becoming homeowners?
Housing affordability is determined by three factors: income, mortgage rules, and house prices.
In terms of income, we note that millennials were hardest hit by the economic downturn and the ensuing jobless recovery. Their income growth has been muted, yet house prices have escalated dramatically. We need to spur economic activity and income growth in all sectors so that young people can prosper.
At the same time, to guard against financial system instability, mortgage rules have been tightening, making it much harder to finance a house. While many of these measures have been intended to cool markets like Toronto and Vancouver, their application has been national, and that impacts markets, like Atlantic Canada, that were already in a bad state.
Our recommendation on mortgage rules at this time is simply this: do no more. Please stop for now. There have been many recent changes, the full effects of which have yet to play out, and it is critical to let these impacts become fully evident before any other actions are taken. There are also mortgage-related tools at the government's disposal that can be better utilized, without increasing market instability or leveraging. Increasing the limits to the first-time homebuyers' plan and allowing intergenerational RRSP transfers within the plan could facilitate increased down payments and decrease homeowner debt.
Perhaps the most interesting options are shared-appreciation mortgages, which should be more aptly named “shared equity down payment plans”. These tools, which have been successfully piloted for low-income families in some Canadian cities, should be considered for helping first-time homebuyers get into entry-level housing across the country.
The final factor thwarting affordability is, of course, house prices. Mortgage rules that limit access may reduce the buying power of homebuyers. What is needed are actions to reduce the upward pressure of house prices so that more first-time buyers can qualify. To address this, we need to understand what is driving those prices up. We have what we call “new fundamentals”. At the top of that list is the lack of supply of family-oriented housing.
Simply put, municipal and provincial zoning and regulatory restrictions in our major urban centres have dramatically reduced the amount of service land available. In the GTA, over the last decade, the number of newly built single detached homes available for purchase has fallen dramatically. GTA price trends reflect this disconnect between what the home-buying public wants and what is available.
With high levels of immigration and a significant increase in the birth rate over the last decade, our largest cities have a serious shortage of family-oriented housing. CHBA estimates that, at the current development rates, Canada will be short over 300,000 such homes in the next decade. Governments at all three levels need to work together to address this problem. So long as demand is outstripping supply, our more successful economic centres will continue to see price pressure and falling affordability, and this is the simple law of supply and demand.
These are issues that need to be addressed in the national housing strategy. From what we heard reported from CMHC, the current focus is almost exclusively on social housing. While social housing is very important, it's only part of the story. The final national housing strategy needs to address market-rate housing where 94% of us live. If we don't fix affordability, we have no chance of meeting the social housing challenge.
We are at a crossroads where home ownership is concerned, and affordability is at the crux of it. But there's a lot we can do to address this challenge. We look forward to working with the government to make it happen for the benefit of all Canadians. We have submitted a more detailed report that I hope you get to have a look at.
We're here for questions. Thank you.
Tamara Barker Watson will be sharing my time, so we'll be diligent on that.
Good evening, Mr. Chair and committee members. My name is Sherry Donovan and with me this evening is Tamara Barker Watson. She's president of the Nova Scotia Home Builders' Association, and also the owner of a 20-year, new-home construction company in Halifax.
Thank you for the invitation to appear.
The issue today is of great importance for us in the Atlantic provinces, which is where we'll concentrate most of our presentation this evening. We'll be talking about the impact the new mortgage rules stress test is having on the eastern Canadian economy, how it affects home ownership for young people, and the impact it will also have on seniors.
We also feel that having one set of rules for the entire country is not the best solution when it relates to housing. We understand that this is about mitigating risk on a large scale across the country. However, what has been achieved is that through this mitigation of risk, there has been cause for great concern about the stress test and the impact these changes will have on the regional residential construction industries that are in decline in the Atlantic provinces. We are still in deep recovery mode from the weak economy, and this is being done at a time when we just cannot afford to have it happen. These new mortgage rules are exacerbating the problem by hurting the entire economy.
For example, from an economic standpoint, in Halifax we went from over 1,000 new single detached housing starts in 2009 to as few as only 400 last year, and according to CMHC, these starts in Nova Scotia continue to remain below the 10-year trend of 900 units. Further to these declining numbers in Halifax, the same situation can be felt all across Atlantic Canada. When you couple it with the new mortgage rules, this is significant.
One testimonial I feel is important to share is from a mortgage lender in Newfoundland. Only a week after the federal announcement, they shared that they would see an even further decline. They estimate that 25% to 30% of the clients they had in the past few months would not have qualified under the new guidelines. As well, one Newfoundland builder also went from 50 home sales on average between a typical October to December season, to zero this past October to December after the new rules came into effect. This is huge.
This is not a positive outcome for Atlantic Canada or the entire country. What seems to be a barrier is the same rules from coast to coast. We are aware that indebtedness of Canadians is a serious issue, but the unintended consequences that have spun out as a result of the new rules have created winners and losers. Atlantic Canada is coming out on the losing end of this equation. This is one of the key reasons we feel that regional rules would be a better solution for Canadians.
Let's look at two specific groups in the home ownership equation: seniors and first-time homebuyers. The new mortgage rules prevent many young people from beginning asset accumulation as many are unable to qualify for a mortgage under the new rules. In addition to the first-time homebuyers being at risk, the unintended consequence is that it will also have an impact on the seniors' market. With a reduced number of buyers seeking to purchase homes, seniors will be less able to access equity in their homes, and it will create disruption in their retirement or downsizing plans. This is a concern for us where the demographic of seniors is higher in Atlantic Canada than in any other area in Canada.
If we can focus our concern on first-time homebuyers, what seems to be missed is the benefit of building equity in a low interest rate environment. When interest rates are at their lowest, the biggest proportion of your monthly debt service goes towards the principal amount of that mortgage. The consequences of these new rules is restricting home ownership growth in Atlantic Canada and also ensuring that when people do buy in the future they are paying much higher interest rates.
As a builder and a real estate agent in Nova Scotia, the impact it's had on my business is huge. The Friday before the new home mortgage rules were introduced, I met with a young couple who were going to put an offer in on one of my new energy-efficient homes in Bedford. They were excited about buying their first home. However, when we met on Monday they no longer qualified. The result was that they chose to sign up and rent for another year, and they bought a new car instead. They are not even sure that under the new rules they will be able to make home ownership a reality in the next several years.
This not only impacted the young couple but also my business. The loss of revenue from sales impacts how we move forward as a company in the future. If this trend continues, we will continue to lay off employees and can no longer afford our subs. This is not good for an already slow economy. If you are going to put more restrictions on young people taking on debt from buying a home, why not restrict them from buying a depreciating asset like a car and create a forced savings plan for them so they will actually be able to save money for their new home?
I also want to draw attention to a statement we made in The Globe and Mail in regard to this issue. If first-time homebuyers default on their ability to pay their mortgage “at the same rate as the general public—which is less than 1 per cent—then the government has decided that protecting young people from themselves is more important than giving the remaining 99 per cent”, which represents the largest percentage of household asset wealth in this country, a chance at home ownership. This will limit “access to new home ownership and the benefits that come with it”.
We appreciate the opportunity to be here today, and we advise you to take action on our recommendation for regional housing rules. We have lost so many builders and potential homebuyers in the past few months in Atlantic Canada that it's staggering.
Because I don't have much time, I want to move quickly to the conversation that was had with my colleague Mr. McColeman in terms of land availability supply.
Being from the GTA, I understand your point, Mr. Finnigan. I'm going to make a quick statement and then get to my question. In terms of development charges being high in these areas, I guess my rhetorical question—and perhaps Mr. McColeman can think about this—is that, and I'm just curious because development charges go to the municipalities that support new homes, what should municipalities no longer supply to bring that cost down? Should we no longer build fire stations? Should we no longer build police stations? Should we no longer plow snow? Should we no longer collect garbage? Those are exactly the things we use that are supported by those development charges.
To get to my question to you, Mr. Finnigan, I'm just curious. You talked about land supply. I know the GTA well, so I want to ask this question. Without those government regulations and the control...because it's not saying that you can't build anymore. It's saying that you need to build higher density and you need to have better land use planning. What happens when the day comes that you've paved over every piece of farmland, every valley, creek, and stream, and eventually the land runs out? I'll tell you: the land runs out and then you get into water.
If you're going to build communities on water, Mr. McColeman, that's a different conversation.
Is the suggestion just to forget that regulation so that future generations are built out and there really is no more housing for anybody? Or is the government regulation really to have better land use and better building and design to also bring in a better efficiency of services?
Welcome, everyone. Thank you for travelling from Toronto and Halifax, if I'm not mistaken, and possibly Ottawa.
After the first eight hours of the housing study, I think a couple of common themes have emerged. I would say, first of all, that the Canadian housing market is based on a series of regional markets and there is no uniform market across the country; that a number of participants would like a pause in the measures, on any incremental new measures; and that risk sharing is of grave concern to some participants. I'm not saying that I agree or disagree. I'm just saying that these are the themes I've seen.
Also, CMHC, proceeding with an original mandate to where it is now, looking at the 69% home ownership rate in Canada—I think it's in the high sixties—has largely been successful, especially for encouraging home ownership in Canada and allowing new entrants to enter the home market. Finally, Canadians are great customers, i.e., we're great credit. We work hard. We save. We want to save for our kids and for the future of this country. We want to invest, pay off our mortgage, take a vacation when we can, and have faith that the stewards of the economy and our regulatory organizations are doing a good job, which in large part I think they are.
I do agree with Mr. Charles and Mr. Smith that a lot of the changes that have been enacted.... You can quibble about the stress test being 50 basis points or 100 basis points higher than it should be, but that's not really the issue. The issue is ensuring that Canadians have access to the home ownership market to buy a house.
My one question is with regard to the pause. Specifically, Mr. Smith and Mr. Charles, both of you gentlemen have been in the housing market for a very long time. I'm not trying to date you. I'm just saying that I know you're very well respected within the industry.
How long do you think before we'll have data that we can see on a qualitative basis to determine what exactly is going on?