The Canadian Real Estate Association would like to thank the committee for the opportunity to participate in the study on the Canadian real estate market and home ownership.
CREA represents over 120,000 realtors from across the country. As one of Canada's largest single-industry associations, we represent real estate brokers and agents, as well as homebuyers and property owners throughout the country.
Canada's housing market is a key component of Canada's overall economic stability and an important generator of jobs and economic security for the middle class. In 2016, each home sale generated over $52,000 in spinoff spending. This translates to one job for every three real estate transactions. In addition, resale housing transactions, through the multiple listing service, generated more than $28 billion in consumer spinoff spending and created more than 198,000 jobs in 2016.
Most Canadians see their home as a source of pride, satisfaction, and accomplishment, not to mention a safe environment in which to raise their family, create happy memories, and create a sense of community. This is why CREA has been advocating for the indexation and modernization of the homebuyer's plan, a program that allows Canadians to use their RRSP savings to purchase their first home. We were pleased to see that the plan was included in multiple election platforms in 2015, and we will continue to work with the government to ensure it remains a valuable program for all Canadians.
As all real estate is local, it is important to note that the housing markets in and around Toronto and Vancouver have different realities compared with markets elsewhere in Canada, most of which are either well balanced or amply supplied. It is crucial to consider and reflect upon different areas of the country when enacting policy that affects a wide swath of housing markets, including places not targeted directly by the government's recent regulatory measures.
Consumer demand in markets such as Toronto and Vancouver is at an all-time high, and there is a significant shortage in the housing supply. Various factors have caused an imbalance in the supply and demand of homes, which in turn drives up prices significantly. As this is a complex matter, CREA is encouraged that the federal government created a working group comprising federal officials as well as provincial and municipal representatives. The three levels of government will be able to focus on the challenges in each region and recognize the local reality for all markets.
While the provincial governments in Ontario and British Columbia have recently introduced measures to assist first-time homebuyers, the federal government has tightened national mortgage rules, thereby lessening affordability for those seeking to enter the market. If the federal government continues to tighten mortgage rules, will this force provincial governments to implement further programs to assist first-time homebuyers?
CREA and its realtor members urge all levels of government to continue to work together to reach a healthy, competitive, and stable housing market. We are prepared to share analysis of local housing market trends and apply our knowledge and data to help the government policy-makers at all levels better understand how changes to housing-market regulations may affect communities across Canada.
Assistance for first-time homebuyers should be top of mind for all levels of government. First-time homebuyers need support to overcome the obstacle of saving for a down payment in order to reach their home ownership dream. The plan's purchasing power is steadily declining and it has become less valuable due to the increase in home prices.
We recommend that the plan be indexed to inflation to preserve its purchasing power and so that it can continue to help first-time homebuyers attain home ownership. Easing affordability concerns is a key principle of the plan, and Canadians should be able to benefit from this program more than once. Canadians and their families who face sudden life changes, such as job relocation, the death of a spouse, a marital breakdown, or the decision to accommodate an elderly family member, may need support in order to maintain home ownership. Expanding the plan to enable Canadians to use their RRSPs as a zero-interest self-loan is a fiscally responsible way to support families through a difficult period of change.
In the last eight years, the federal government has implemented six rounds of changes to tighten the rules for new government-backed insured mortgages and to contain risks in the housing market. These measures have been implemented, some over a very short time period, and their full impact has yet to be determined.
We recommend that the government take a pause to fully evaluate the cumulative impact of the changes before looking at implementing additional measures.
Thank you for your time. I would be pleased to answer any questions the committee members may have.
Good afternoon, honourable members. Thank you for the opportunity to contribute to this important work you are all doing.
Dominion Lending Centres is Canada's largest network of accredited mortgage professionals, with over 5,000 active brokers nationwide.
Together with our affiliated companies, we facilitate approximately 38% of all mortgages brokered in Canada, more than any of the big five banks.
At DLC we pride ourselves on both being experts in the finances of real estate and having our ears to the ground, when it comes to the concerns of the Canadian consumer.
Each year our mortgage professionals work alongside lenders to provide Canadian families the opportunity to realize the dream of long-term financial security in a home.
Before we begin, I want to make it clear that mortgage brokers are neither part of a big bank nor monoline lenders. Mortgage brokers originate one-third of all new mortgages in Canada each year. We provide competitive tension between lenders, and choice and options for consumers, and we serve not only major urban centres but also the small underserved regional communities that make up the landscape of our country.
Our job is to find consumers the right mortgage for their family at the best rates. We are agnostic as to which solution is right for each family, and we are agnostic as to which lender funds that mortgage.
We are, however, an authority on value. We find, broadly speaking, that a lot of the new rules that have been proposed here would drive down affordability. Our biggest issue with these proposals is that the government did not consult with our industry, our brokers, our monoline partners, our credit union partners, our two competitive insurers, our real estate partners, our housing partners, or anyone outside of the big banks for that matter.
Policy-makers did not have the benefit of our intimate perspective when they made these changes unilaterally, something that will end up hurting all Canadians. These proposals skew consumers in the direction of the already dominant big banks, and while those may represent viable solutions for some Canadians, for many others, the monoline lenders better fit their needs.
When policy favours the big banks, it reduces overall competition in the mortgage marketplace, and that hurts Canadian consumers, regardless of what solution they use for their homes.
The other thing I want to emphasize before we begin is that these national-scale changes are impacting the entire country, whereas they're clearly directed at two hot housing markets, Toronto and Vancouver. We think that a smart policy would be to implement whichever proposals are enacted, on a regional basis, taking into account differences across the country.
While we understand and agree with the government's desire to protect consumers, Dominion Lending Centres disagrees with certain aspects of the recent mortgage rule changes as they make housing less affordable, not more affordable.
Let's begin with the stress test. The net effect of the stress test on many homebuyers is that their purchasing power has now been reduced by upwards of 20%. This has a significant impact not only on first-time homebuyers, but on many middle-class Canadians who need extra room for their growing families. As a result, housing is less affordable rather than more affordable, and individuals and families who have had their purchasing power reduced have to look at purchasing condos with monthly fees, or smaller homes in less desirable locations that require them to commute to work and school.
Others, who now must postpone home purchases to save more money, are falling further behind as house prices in many regions rise and become further and further out of reach.
We agree with the government's core objective of reducing the risk of a major rise in defaults should rates increase. We also agree that a stress test is the most prudent policy to achieve this. But what I can also tell you is that even with a hot housing market, there is a very low chance of the kind of defaults witnessed in the United States in 2008, given that the current default rate is 0.28%. That's right. It's roughly just one-quarter of one per cent. It's important to remember that when setting the rate at which the stress test is implemented.
Let's move to the restrictions on low-ratio mortgage insurance eligibility requirements. While traditional lenders, the big banks, have multiple revenue streams to finance mortgage loans, giving them the ability to effectively insure their own loans, the same cannot be said of non-bank or monoline lenders. Monoline lenders access funds through the mortgage-backed securities market, which can be accessed only with insured mortgages. They rely on portfolio insurance to finance their lending activity.
As a result of the new requirements, investors are less inclined to fund monolines that now must charge higher rates, as investors expect a risk premium that must be priced in and passed along to the consumer. This, again, puts the banks at a competitive advantage as the monoline rates and costs go up. Mortgage credit availability is reduced to the extent that some monolines will now be forced to close or merge with other institutions, also reducing competition in the marketplace. Again, just like the new stress test rules, the net impact on the consumer is negative, making housing less affordable.
Because the new rules prohibit insurance on non-owner-occupied properties, there is an added strain on the already tight rental market, as those who invest in rental properties now face higher rates and much fewer borrowing options.
We recommend that the government reverse these changes or at least allow refinanced mortgages and mortgages on homes valued at up to $1.5 million to be portfolio-insured, given that in some major markets homes over $1 million are commonplace and not a luxury. We would also be open to seeing the threshold reduced to a 75% loan-to-value ratio, rather than removing eligibility for these products entirely.
With regard to mortgage insurance rules and lender risk sharing, we believe that a lender risk-sharing program would raise the risk associated with funding mortgages and increase the amount of capital that lenders require. Again, while banks are sufficiently capitalized to retain loans on their books, smaller lenders are not and thus they would need to increase mortgage lending rates to offset additional risk, increasing costs to consumers. Even the banks are likely to pass off the costs of risk sharing to the consumer, increasing fees and mortgage rates, further reducing housing affordability.
In summary, Dominion Lending Centres recognizes and appreciates the government's legitimate concerns regarding the debt load of Canadians and housing affordability. Regardless of whether someone lives in a hot housing market, like the GTA, or in the Prairies, where house prices have remained flat for the past several years, it is important to remember, when setting and analyzing housing and mortgage policy, that 70% of households in Canada own their dwellings. Many Canadians are relying on equity in their home for their retirement cushion. By making housing less affordable and reducing demand—impacting home values and skewing the market in the direction of the large banks—we are unintentionally putting home ownership out of reach for many Canadians and making it more expensive for those already in their homes today.
It will be a sad day when the government unintentionally lops off more than 20% of Canadians' net worth by hastily instituting a policy that radically impacts one of the most admired housing markets in the world.
With regard to mortgage rules and recommendations, and in addition to the recommendations I've mentioned here today, we echo those put forward by Mortgage Professionals Canada, as well as many of the insurers and monoline lenders. We think that, as this is an industry that handles more than one third of all mortgages in Canada, it's important to consult mortgage brokers and industry stakeholders in advance, before setting these types of policies.
In summary, we have five proposals.
Number one, allow 12 to 18 months to study the impact of all changes made to date before considering any further changes.
Number two, modify the stress test to better reflect future rate expectations, and mandate that banks have to qualify all conventional mortgages at the same stress test threshold, eliminating the existing unlevel playing field.
Number three, given the number of further damaging consequences, do not proceed with the risk-sharing model.
Number four, reverse the decision and allow portfolio insurance on refinances and rental properties. If an 80% loan-to-value ratio is objectionable, reduce the threshold to 75% rather than removing that eligibility entirely.
Number five, continue to work closely with other levels of government and industry to study and address individual housing markets at the regional level.
One last point I would make, which I think is pertinent, is that it has to be clearly understood by everyone that we are not against the “big five” banks in Canada. They are great partners to us, and we do a lot of business. As a matter of fact, we do more loan origination through them than through any of their other partners. We're on their side, and we've been very supportive of every mortgage rule change since 2008, more than two dozen of them.
This is the only time ever that you've made a change unilaterally, and very quickly, without proper consultation, which is having a massive impact on Canadians and their families. This is the only time when the industry has come together universally and said, “Listen, we want to at least provide our feedback, because we think that there has been an error this time. We think that this is not prudent policy.”
I'll wrap by thanking all of you for the opportunity. Thank you for having us here today.
My name is Katherine McDowell, and I'm the current president of the Alberta Mortgage Brokers Association. With me is our past president Adil Mawji. We are both licensed and practising mortgage brokers in the province of Alberta. Also joining us is our executive director, Amanda Roy. We appreciate the opportunity to share our thoughts with this committee.
The Alberta Mortgage Brokers Association is the oldest mortgage industry association in the country. For more than 40 years, AMBA has been the voice of the province's mortgage community, including brokerages, lenders, insurers, and industry service providers. More than 2,200 mortgage brokers representing 377 companies make their living in our province by helping Albertans achieve their dream of home ownership.
Canadian mortgage brokers represent $80 billion in annual economic activity and are changing the landscape of mortgage borrowing for the next generation, with 50% of first-time homebuyers using brokers. In Alberta, our members contribute heavily to the provincial economy by arranging financing for new home constructions, resales, and refinances for home improvement and debt services. Mortgage approvals alone in the province generated more than $30 billion as far back as 2010, according to Statistics Canada. We are seeing first-hand the negative impact of the mortgage rule changes across Canada, especially to the Alberta consumer and economy.
The unintended consequence of what we believe were mostly unnecessary changes at this time is a weakening of the middle class through the transferring of wealth in the form of higher interest costs and mortgage insurance costs for the consumer.
Alberta has been the poster child for what regulators fear. There have been two years of solid recession. According to the regulators, these changes were made to protect consumers from any impact resulting from higher unemployment rates or interest rate increases. We are not against a stress test in some form, although not as it currently exists, but our province has already been a test environment for the effects of unemployment. Prudent underwriting rules previously put in place for those very reasons have already given us the ability to weather that storm.
In 2014, Alberta had an unemployment rate of 4.7%, and the number of households in arrears was 0.27%, which was just under the national average. By 2016, our unemployment rate had drastically increased from 4.7% to 8.5% by the fourth quarter, and the number of households in arrears was 0.41%. An 81% increase to unemployment between 2014 and 2016 resulted in a relatively moderate increase in delinquencies from 0.27% to 0.41% in that same time period, according to CMHC data.
At this time, we don't even know the impact of the wildfires in Fort McMurray in May of 2016, but according to that data, Q2 reported a 0.37% rate of delinquencies, and that number jumped those last few percentage points to 0.41% by the end of Q3. So we ask, what are these changes really protecting the taxpayer from?
We consider the stress test to be a prudent underwriting measure to protect the Canadian taxpayer. However, we do feel the newly introduced qualifying rate and the way it is calculated are too severe, at 200 basis points higher than the average contract rate.
For consistency across all mortgage applications and for consumer protection, we'd like the government to consider slightly tweaking the qualifying rate and how it's calculated in order to better reflect market conditions. As an example, a potential solution that could be explored is contract rate plus 1% to be applied across all mortgages.
Other presenters to this committee have previously explained how securitization works, but what hasn't been explained is how it directly affects the middle class. Since October 2016, those attempting to buy a home without default insurance have been adversely affected by the transfer of wealth due to increased interest rates from this policy. This is also true for those refinancing.
For example, a middle-class first-time buyer from ten years ago, who has equity in the home and needs funds to renovate in order to move his aging parents into a fully developed basement, is forced to pay more to do so now. Refinancing for this purpose or for other investments typically helps build wealth in the household. The policy change of removing refinances from portfolio insurance will cost these individuals more through increased interest costs, resulting in a decrease in the potential middle-class wealth.
Canadian consumers are now forced to pay more for their mortgages because of the new OSFI guidelines, which make mortgage insurance more expensive to the lenders. As a result of the requirement from mortgage insurers to hold more capital against mortgages they insure, we have seen mortgage insurance premiums increase for both low- and high-ratio mortgages. The effect of this increase on mortgage lenders, both bank and monoline, has been to build that cost into the interest rate charged to the mortgage borrower.
Today we are seeing discounted interest rates on all high-ratio insured mortgages. However, for any low-ratio insured mortgages and any uninsured mortgages, the cost of implementing the capital requirements has been passed on to the mortgage borrower to bear by way of increased interest costs.
Interest rates have been adjusted to reflect the added costs of portfolio insurance or the added cost of capital for lenders to hold these mortgages on their balance sheet. In some cases, these increased costs have almost negated increases to the Canada child benefit.
If a consumer claiming the Canada child benefit for a one-child family makes $90,000 a year, their tax savings would be approximately $1,120 per year. If they have an uninsured mortgage, they would have to earn nearly $1,100 more to pay the additional interest costs on a $400,000 mortgage.
For the high-ratio consumers putting 10% down, due to increased insurance costs their future home equity decreases by $2,700, which is reflective of the amount for an extra premium on a $400,000 mortgage as well.
In closing, we would ask the committee to consider making changes to the new rules in five areas.
We ask that you reconsider the reinclusion of refinances in portfolio insurance.
We recommend the modification of the current stress test to a more market-plus approach.
We ask that you review the increase to the capital reserve requirements and ask more questions about how it was balanced. Alberta, for example, had a significant increase to unemployment, topping at 9%. What was the increase in losses year over year for the insurers? Was it proportional to the increase in insurer capital requirements?
We also request a study into the potential ill effects of regional-based pricing for insurance and request that you consider the effects of regionality as part of the risk-sharing model. We believe that over time it will become very detrimental to Canadians in economically challenged areas where stimulus, rather than added costs, is needed.
In moving forward, we would also ask that the Alberta Mortgage Brokers Association as well as all stakeholders who have testified before the Standing Committee on Finance be considered key stakeholders to be consulted when the committee reviews all real estate finance changes in Canada.
Thank you, Mr. Chair, for your time. We are prepared to take any questions you may have.
What happened in that movie was basically true. I lived it and I saw it.
We have a very resilient housing market. But we also have CMHC, which is effectively backstopped by the Canadian taxpayer. So any government, Conservative or Liberal, needs to be prudent.
In my last session, I said, “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 think it is prudent for any government, be it on the Liberal side or in the past on the Conservative side, to do so. I continue to believe it and I think many of the measures that were introduced by the federal government, Liberal or Conservative—because the changes started under the past administration—are prudent and need to be put in place.
I want to make that remark, because I think it's important to be on the record. We're not trying to not have people enter the housing market. We just want to make sure that the level invested is manageable. We do have regional markets, I agree.
On the consultation point, I remember in my past life that the past administration made a big change to something called the income trust market. They announced it about 4:45 p.m., after the market closed, and that market basically collapsed. Income trusts, at the time, were a pretty popular thing for a lot of companies to do, issuing cash to shareholders and so forth, and the market collapsed.
The Conservative party broke that promise. They said they would never tax income trusts and they did. They didn't consult, particularly when they didn't tax the prices of publicly traded securities. It affects behaviour.
Consultation is important, I agree; I get it. But when certain measures need to be introduced, when there is an impact and when there will be an impact on market behaviour, individual behaviour, sometimes measures need to be introduced. So let's put this on the record.
I have one question to end this. Thank you, Mr. Chair.
I want to quickly address the point about consulting and publicly traded companies and how that might impact....and that kind of thing. Most of us, at least those of us who were there on the call in Kelowna just before doing pre-budget consultations, heard directly—because Mr. McColeman asked specifically if they consulted—Finance officials confirm that they did not do a formal consultation. They said they would not call it a consultation, but they did discuss it with some banks.
Mr. Chair, for anyone to say that this is all about keeping that protection so no one gets an advantage from it, that's ridiculous. We heard that, and I would just refresh that in some people's minds.
Consulting can be a very good thing. Yes, we did take some measures after 2008, which, as many people pointed out to me, was the ultimate stress test. We heard from Ms. McDowell today. She says there's an 81% increase in unemployment in Alberta, and I think going from 0.26 of one per cent for default to 0.41 of one per cent shows there's huge resilience within the system.
For people to be saying this is about debt.... The prudence of the people in the business are what is giving us such a good system. Yes, it could be argued that some adjustments have not been well received by the industry. They have said themselves that they have never seen this.
I'm going to get right into my questions now.
First of all, we talked about refinancing and how many mortgage loan companies may not be in that market anymore because of the increased costs of a refinance. I've talked to a credit union. They've seen an uptick in second mortgages. Now, to me that's concerning. A second mortgage puts a person in a much more precarious state to achieve the same goal.
Mr. Mauris, since your mortgage brokers do about 39% of the business, have you seen anything?
Thank you very much, Mr. Chairman, honourable members, and ladies and gentlemen. My name is Keith Lancastle. I'm the chief executive officer of the Appraisal Institute of Canada.
Joining me is our national president, Dan Brewer, who is an AACI, P.App-qualified fully designated member of our association from the Toronto area. We are very pleased today to present our members' concerns and recommendations to the Standing Committee on Finance as you consider issues around the Canadian real estate market and home ownership.
The Appraisal Institute of Canada has over 5,200 members, who provide unbiased opinions of value on residential, commercial, and all other types of real property. Our members are university-educated and complete a rigorous program of professional study. The scope and the conduct of our members' services are defined by our Canadian Uniform Standards of Professional Appraisal Practice. As a self-regulatory body, we have a strong focus on consumer protection. We maintain a robust disciplinary process, and we offer a mandatory professional liability insurance program to help protect consumers. AIC is very supportive of the Office of the Superintendent of Financial Institutions' guidelines B-20 and B-21 and some of the other more recent measures that have been implemented to help stabilize the Canadian housing market. Today, however, we would like to discuss two areas of concern. First, we want to address the risk of potential dilution of sound mortgage underwriting practices across the marketplace. Our second concern is in the area of the increasing potential for, and risk of, mortgage fraud.
In the area of sound mortgage underwriting practices, we know that the majority of Canadian mortgage lending is still being done through federally regulated institutions, but the market share of non-federally regulated financial institutions continues to grow. The inherent risk is that the mortgage underwriting practices of these two categories of lenders may be inconsistent and may over time result in a two-tiered lending system.
The reality is that despite federal policies and procedures to cool the real estate market, there are still many Canadians who are very desperate and determined to enter or remain in the housing market. Some existing homeowners now find themselves in the situation where they must consolidate their debt. In either situation, if borrowers are turned away by a federally regulated institution, they are more likely to look towards other lenders to secure mortgage funding.
We recognize that non-federally regulated financial institutions are a very important part of the market. However, in some cases these lenders serve a cohort of the Canadian marketplace and Canadian consumer base that may be higher risk in nature. Unfortunately, there is limited information available on the full scope of who these lenders are or what their mortgage underwriting practices may be. Put another way, there is a growing share of the market that is not necessarily competing on the same basis and to which the same regulatory oversight may not apply. This scenario, in our opinion, is a potential risk to the financial system and to the housing market.
The absence of a level playing field could well have an unintended impact on the market: first, by essentially increasing the indebtedness of Canadians; second, with higher-risk borrowers entering or remaining in the market, which exacerbates issues around housing demand; and third, through the increasing likelihood of mortgage default in the event of a decline in the real estate market.
We are aware of non-federally regulated lenders that apply very stringent underwriting approaches to both borrower qualifications and collateral valuation. We are concerned, however, about the actions of lenders that may have less rigorous approaches to mortgage underwriting. Guideline B-20 has established a very sound and balanced framework, recognized throughout the world, that requires assessment of not only the borrower's capacity and willingness to repay but also a commitment to strong valuation fundamentals. As we have seen in other countries, the absence of a balanced and consistent approach can and will have a significant impact on the consumer and on the real estate market as a whole.
Like many of the other organizations that have appeared before this committee, AIC agrees that there is a need for the Government of Canada to take time to analyze the impact of recent policies before implementing new regulatory measures. That said, AIC is also recommending the expanded application of guidelines B-20 and B-21 as well as the recently announced measures to any and all organizations that are providing mortgage financing. This step will do much to ensure more consistent lending practices and make for a more stable marketplace.
Second, AIC would like to express our concerns about the potential increase in mortgage fraud. This concern is supported by a recent Equifax study that revealed that instances of mortgage fraud in Canada have risen along with the escalating prices in the Toronto and Vancouver areas. Equifax has noted that “the number of potentially dishonest mortgage applications has grown by 52 per cent over the past 4 years.”
Appraisers have the expertise to raise red flags in a real estate transaction, helping lenders better detect any potential mortgage fraud concerns before they occur. On-site appraisals carried out by qualified professionals are an effective way to help all parties involved in mortgage underwriting to detect fraud and to better mitigate lending and property investment risk. To that end, our recommendation is that all organizations involved in lending work together to better detect potential incidents of fraud. The government can encourage and potentially facilitate sector-wide dialogue and engagement on this topic.
Mr. Chairman and honourable members, we are privileged to have been invited here today to share the perspectives of our members. We appreciate the chance to share our recommendations and would also be very pleased to respond to any questions or comments you may have.
In 2017, in fact, we are forecasting a drop in residential sales in Quebec in the order of 7%. Those most affected by the new mortgage rules are mostly buyers with a down payment of less than 20%, meaning mostly first-time buyers.
According to our estimates, the interest rate stress test alone should exclude between 5,000 and 6,000 Quebec buyers from the market in 2017. That represents about $220 million less in ancillary expenses. In addition, since the purchasing power of a number of households will be cut off by the stress test, we forecast that Quebec property prices will not increase in 2017.
The Quebec real estate market should not suffer the effects of the overheating in Toronto and Vancouver. In fact, the Quebec real estate market is not the same, for the following three main reasons.
First, our property prices are much more affordable than in other Canadian provinces. In 2016, the average property price in Quebec was $281,000, compared to $471,000 in the rest of Canada. Even Montreal, where the average property price is approaching $350,000, compares favourably with the average property price in Toronto, which is $730,000, and in Vancouver, where the average is almost three times higher, at just over $1 million. In Quebec, the lower prices mean that excessive levels of household debt are less of a factor.
Second, far from seeing any overheating in a number of regions, current conditions for the Quebec real estate market shows the balance tilting towards buyers. For that reason, property prices have grown only 5% between 2012 and 2016, that is, since the maximum amortization period was tightened from 30 years to 25. The soft landing has been achieved and other measures are unjustified, if not harmful, because they could cause property prices to drop in a number of regions. Real property is generally a household's greatest asset.
Third, Quebec is significantly behind the other Canadian provinces in terms of the rate of home ownership. In fact, only 61% of Quebec households own their homes, whereas the rate in all the other Canadian provinces without exception is 70% or more. The new mortgage rules that have been in force since last October will put a major brake on ownership. For example, before last October 17, to qualify for a $300,000 loan, gross household income used to have to be about $59,000. Today, it has to be about $72,000. That clearly shows how the “stress test“ will exclude a significant number of potential middle-class buyers.
On the heels of the stress test, which requires lenders to use a hypothetical rate of interest, comes a third increase in mortgage insurance premiums in four years and reduced competition in the mortgage market. Those three factors will come together and prevent a number of young families from achieving their dream of home ownership under the same conditions as the generations that went before.
Thank you, Mr. Chair and honourable members.
I'm a representative and a board member of the Urban Development Institute. My name is David Graham. I'm also a developer in Halifax.
The Urban Development Institute board represents predominantly land, rental, condo, home, or building developers. In Halifax, we have experienced a decrease in the sale of new homes, single family homes, and detached homes over the course of the last four years. What had predominantly been a market of a thousand homes a year has decreased to a low in 2015 of 425 homes. This past year it was 550. It might caused by a variety of reasons. One of these is that we have an aging baby boomer population that's moving into rental accommodation. We also have immigrants who are coming in and moving into rental accommodation. As well, millennials, at this point, can't seem to get into the market in the way they would like to.
I think it's worth noting that 45% of the resale transactions in Halifax are for less than $250,000, and 75% of the housing resale transactions in Halifax are for less than $350,000. I emphasize that number because we're not Vancouver and we're not Toronto, and we don't want to have regulations imposed upon us that might be partly or entirely geared towards correcting a housing bubble in both Vancouver and Toronto.
To that end, we'd like the finance department to acknowledge or appreciate—and I'm sure it does—the very diverse and different markets that exist across the country.
While there are imbalances in the Canadian housing market, Halifax is a very stable market. It relies on first-time homebuyers to get into the market so as to generate a second round of home purchases, and in time, a third round and so on. Decreases in the number of first-time homebuyers in the market have a negative effect that will exacerbate a market that CMHC already categorizes as weak.
Because we believe that we have a balanced market, if the finance department is concerned about certain markets—and I emphasize Vancouver and Toronto—one way to avoid painting the secondary markets with that broad brush might be to properly apply regulations on home prices. Namely, we could potentially have a tiered system. We recommend that the finance department consider a tiered system in which the stress tests and new mortgage rules wouldn't apply to homes that are under a certain value—$350,000, for the sake of the argument. Such a policy would not be detrimental to markets that are currently in balance, which are predominantly secondary markets.
I will point out that the National Housing Act was expanded in 1954 to make home ownership more accessible to Canadians. New rules and modifications consistently reinforce this objective over time. In 1999, the National Housing Act and CMHC introduced a 5% down payment plan, removing a significant barrier for first-time homebuyers.
I will now draw on a hypothetical scenario. If defaults represented 0.5% of the market and we wanted first-time homebuyers to start asset accumulation at a young age in these low interest rate environments, then hypothetically, out of every 200 mortgages that would be recorded, 199 people would have the opportunity to be in asset accumulation at this time of historically low interest rates. One person would default.
We would like to ask the following questions to the finance department, if you would be kind enough to supply them for us: Can you provide more evidence on how you arrived at your conclusions to put new mortgage rules in place? Does data exist that follows the success—or the failure, as the case may be—of the initiative contained in the National Housing Act regulations of 1999 to have a 5% down payment plan? Is there data that can be used to compare any notable change in default rates as a result of this initiative or, conversely, the number of first-time homebuyers this initiative was able to get into home ownership?
Finally, in the context of getting first-time homebuyers into asset accumulation in the form of housing, have you modelled the consequences that come with the number of first-time homebuyers who are not able to buy a home and what their alternative spending habits are in the absence of such a forced savings plan?
Thank you for your time.