MONTREAL ― Evan Siddall, the president and CEO of Canada’s government-run mortgage insurer, appears to be a master of the ancient art of misdirection.
He threw the real estate industry a head-fake several weeks ago, when he hinted to a parliamentary finance committee that Canada Mortgage and Housing Corp. (CMHC) was considering raising the minimum down payment on an insured mortgage to 10 per cent from the current five per cent.
That sent a collective shudder through the industry, already reeling from a steep drop in home sales amid COVID-19 pandemic lockdowns. A move like that could seriously depress demand from first-time homebuyers, requiring them to save up twice as much money for a down payment.
So when CMHC announced new mortgage underwriting rules this week, and there was no increase in the minimum down payment, the industry responded with a sigh of relief.
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But while Siddall may have expertly softened industry backlash with his misdirect, the rules he introduced still have a major impact on first-time homebuyers.
Any mortgage with less than 20 per cent down requires insurance, and to qualify for that insurance, borrowers will need to have a lower debt load than they used to.
Under the new rules, the percentage of income a household spends on housing costs, including the mortgage, can be no more than 35 per cent, down from 39 per cent under the current rules. The maximum share of income spent on all debt payments drops to 42 per cent, from 44.
That change might not sound like much, but according to mortgage comparison site Ratehub, it reduces the maximum purchase price for first-time homebuyers by up to 12 per cent.
A household with $100,000 in income and a 10-per-cent down payment can currently afford a house of $524,980, but would have a maximum purchase price of $462,860 under the new rules, Ratehub said.
That has some criticizing CMHC for picking what they say is a bad time to tighten lending standards.
“Normally, you don’t rock the boat when you’re already taking on water, but that’s what CMHC has done,” mortgage site RateSpy wrote on its blog. RateSpy’s estimate is that the new rules will cut maximum purchase prices by 11 per cent.
CIBC economist Benjamin Tal estimates the rule means 5 per cent of homebuyers will not be able to qualify for a mortgage. Another one per cent will be affected by another rule change: CMHC is raising the minimum credit score for an insured mortgage to 680, from 600.
One other change ― effectively barring people from borrowing money for the down payment ― isn’t expected to have much impact. Homebuyers more often get cash gifts from family than loans, and rules around private loans can be hard to enforce.
Temporary rush of buyers?
“CMHC’s move to tighten mortgage lending standards will almost certainly reduce home sales to some extent,” TD Bank economists Ksenia Bushmeneva and Rishi Sondhi wrote.
But in the short term, Canada could see a rush of homebuying in June, ahead of the July 1 implementation date ― what the economists called a “pull-forward of activity.”
They also suggested that Canadians who don’t qualify for mortgage insurance at CMHC could still turn to the two private mortgage insurers in Canada ― Canada Guaranty and Genworth Financial. However, only CMHC insures mortgages for homes in multi-unit buildings.
“Anecdotal reports suggest that it is likely that private default insurers will not match CMHC’s lower debt ratios. They might, however, be more selective in their approval processes,” wrote Sherry Cooper, chief economist at Dominion Lending Centres.
Cooper described CMHC’s move as “procyclical” ― meaning it’s likely to make the housing market even weaker in a time of weakness.
“Normally, you don’t rock the boat when you’re already taking on water, but that’s what CMHC has done.”
But protecting Canada’s financial system from excessive debt appears to be taking precedence for Siddall. He warned parliamentarians in May that Canadian mortgage borrowers face a “debt deferral cliff” this fall when they have to start paying deferred mortgages again.
He added that as many as one in five Canadian mortgages could be in deferral by this fall.
With so much in unpaid loans, Canadians’ debt burden will soar well past its previous highs, Siddall predicted. Canadians could owe as much as $2.30 of debt for every dollar of disposable income by the end of this year. The previous high, set a few years ago, was $1.78.
“Almost everything we’ve done in response to the crisis involves borrowing,” Siddall said. “Just as governments are taking on more debt … mortgage deferrals (are) adding to household debt.
“The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s long term financial stability.”
But Dominion’s Cooper says this will put more downward pressure on the market.
“Suffice it to say that this batters buyer and seller confidence and, all other things equal, has a net negative impact on the near-term housing outlook,” she wrote in a client note.
Canada’s mortgage default rate is low, and is likely to remain low even by CMHC’s projections, so “in my view, these changes are unnecessary to protect the prudence of Canada’s home lending practices,” she concluded.