An Egregious Crime

Steve Saretsky -

After publishing the industries most bearish housing forecast, which called for a slump in property prices between 9-18% over the coming twelve months, CMHC delivered another blow to the real estate sector. This time, announcing they’ll be choking off credit for Canada’s most levered home buyers. Effective July 1, CMHC will lower both gross debt service ratios and total debt service ratios, pushing minimum credit scores higher, and eliminating sources of down payment that increase indebtedness.

“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO. “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

n other words, CMHC is making good on its own forecast by directly reducing credit flowing into real estate. These changes result in a 10-11% reduction in how much one can borrow for the purchase of home using an insured mortgage, ie home purchases under $1M using less than a 20% down payment.

The moves are not insignificant, as nearly 1 in 3 new mortgage originations in Canada are insured. Of course, this number is much smaller in cities like Vancouver & Toronto, where average home prices have ballooned beyond the $1M insurable threshold. Nonetheless, Canada’s mortgage agency has voiced its displeasure with debt levels in this country.

It’s certainly hard to argue credit standards shouldn’t be tightened. Canada’s household debt to GDP ratios are some of the highest amongst developed economies. Furthermore, there’s a strong relationship between mortgage credit acceleration and the growth in home prices. In other words, the reason housing has become so unaffordable is therefor not from a lack of credit, but rather too much credit. And with central banks determined to pin interest rates to the floor, further macroprudential policies will need to be implemented to offset another debt orgy.

Realistically these measures should have been introduced years ago, and introducing them today could certainly slow any economic recovery. To which CMHC’s Evan Siddall certainly believes the pros outweigh the cons. “We acknowledge the potential ‘pro-cyclical’ negative impacts on housing markets of CMHC’s decision to tighten underwriting. However, the benefits of preventing over-borrowing far exceed these costs. Not acting also exposes young families to the tragic prospect of foreclosure.”

Love him or hate him, this guy hasn’t back down in his quest to save Canadians from themselves. A noble gesture when most Canadians consider it a human right to have a house and a HELOC. Restricting credit, after all, is considered an egregious crime in Canada.

This move is a long term play, something you rarely see in politics.

Three Things I’m Watching:

1. Per the Bank of Canada, one in five households can only make up to two months of mortgage payments using liquid assets and about one-third can make up to four months of payments.

2. Forecasts from the Bank of Canada, suggest without deferrals, the mortgage arrears rate reaches a peak of 1.3%. Slightly higher than the historical peak of 1% witnessed in the early 1980s. With deferrals, the arrears rate remains relatively flat over much of 2020, eventually rising to a peak of 0.5% in the second quarter of 2021.

3. Bank of Canada balance sheet has more than tripled since COVID.


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The Saretsky Report. December 2022