Skook: On Monday, October 17, 2016, in a Globe and Mail opinion piece, Canada Mortgage and Housing chief executive office Evan Siddall informed the public and business leaders that the federal agency would be issuing it first ever ‘red’ alert on the nation’s housing sector. The G&M followed with two articles; one on Monday and one today. I am posting all three pieces here beginning with Mr. Siddal, followed by today’s G&M article and then Monday’s piece - all for quick reference.
The intended consequences of new housing policies
Contributed to The Globe and Mail, Monday, Oct. 17, 2016
Evan Siddall is President and CEO of Canada Mortgage and Housing Corporation.
Finance Minister Bill Morneau announced a broad suite of initiatives on Oct. 3 to ensure that overheated housing markets do not compromise Canada’s economic growth. Canada Mortgage and Housing Corporation welcomes these initiatives and indeed had a hand in developing them with the Department of Finance. Part of our role is to advise the government on housing policy.
Some critics now accuse us of overlooking the “unintended consequences” of our actions. In fact, the results of these policy changes were fully intended.
The federal government requires lenders to buy insurance on mortgages where the buyer has a down payment of less than 20 per cent of the purchase price. Most people who use this support are first-time home buyers.
After the minister’s announcement, a “stress test” using the higher Bank of Canada posted rate must now be used to underwrite guaranteed mortgages. This measure will help offset the highly stimulative effect of low interest rates. Secondly, while lenders are free to offer more flexible terms, the government will no longer guarantee any mortgages on properties valued above $1-million or those with amortizations beyond 25 years. Third, Mr. Morneau also announced some income-tax changes to reduce abuse of the personal exemption from tax on the sale of homes.
By virtue of its role in guaranteeing these mortgages, the government assumes responsibility to ensure the programs support a healthy and growing economy. As such, the rules surrounding mortgage loan insurance have been tightened six times since 2008 in order to reduce housing-market risks. The IMF and OECD, among others, had called for additional action. The announcement was a further response and also proposed discussions on how these risks should be shared in the future.
Action was needed. The level of household indebtedness in Canada is now at a historic high of 168 per cent of disposable income. The Bank of Canada calls this factor the greatest vulnerability to our economy. The bank has highlighted growing debt levels among the most vulnerable homeowners as a particular cause for concern. This includes many first-time home buyers with less job tenure and higher demands on their pocket books.
Concerns about elevated prices in Vancouver and Toronto are well-known. Affordability pressures hurt lower-income households the most and cause real socioeconomic consequences. CMHC has recently observed spillover effects from Vancouver and Toronto into nearby markets. These factors will be reflected in our forthcoming Housing Market Assessment on Oct. 26. They will cause us to issue our first “red” warning for the Canadian housing market as a whole.
High levels of indebtedness coupled with elevated house prices are often followed by economic contractions. In their book House of Debt, economists Atif Mian and Amir Sufi called the relationship “so robust as to be as close to an empirical law as it gets in macroeconomics.” The conditions we now observe in Canada concern us.
These changes will both reduce home buyers’ ability to borrow and increase lenders’ funding costs.
We expect mortgage rates to increase modestly in response. Our government-backed mortgage funding has encouraged some unhelpful mortgage-lending activities. These business models will have to change since government should not be supporting lending that threatens our economic stability.
We expect Mr. Morneau’s actions therefore to support our economy. Seen this way, the resulting delay in when people can purchase their first home, or their decision to buy a smaller home, rent or stay put is rather a small price to pay. And tighter lending standards will limit price increases, ultimately making houses more affordable.
CMHC's ‘red’ alert: Surging home prices spread to suburbs
Brent Jang, VANCOUVER — The Globe and Mail, Tuesday, Oct. 18, 2016
Hot markets in Vancouver and Toronto are causing home prices to rise in nearby areas, prompting Canada’s housing agency to issue a red alert about the country’s real estate sector as a whole.
Canada Mortgage and Housing Corp. chief executive officer Evan Siddall said in an interview the agency’s “red” warning means that there is a strong risk of problems on the horizon. Ottawa uses
CMHC analyses to guide its policies for the housing industry.
“We’re observing the spillover effects in the central markets of Vancouver and Toronto, affecting nearby markets. In Toronto, it’s affecting Hamilton and Oshawa. Outside of Vancouver, it’s places like Richmond and the Fraser Valley. You’re seeing price acceleration,” Mr. Siddall said. “At the nationwide level, the evidence of problematic conditions has become high – that’s what red means. It’s not predicting a crash.”
The problems include not just rising prices, but overvaluation.
CMHC will boost the risk rating in its overall assessment of the country’s residential market to “strong” from “moderate” when it issues a new report on Oct. 26.
Mr. Siddall first disclosed CMHC’s decision to issue the red alert in an opinion column on Monday in The Globe and Mail. CMHC’s new warning has been months in the making. The agency rates 15 metropolitan markets as weak (green), moderate (yellow) or strong (red) based on risk signals.
Earlier this month, federal Finance Minister Bill Morneau announced measures to tighten mortgage rules, such as a new standard for gauging whether buyers can handle an eventual increase in interest rates. Those changes took effect on Monday.
“If people can just save a bit more money and have a bit more equity in their homes, that would be safer,” Mr. Siddall said. “A 5-per-cent down payment means you don’t have a lot of cushion on the downside.”
The federal government’s decision to tighten lending rules will reduce demand from prospective home buyers, the real estate industry argues. “The government has taken away the punch bowl, the party is coming to an end,” Vancouver real estate agent Steve Saretsky said in an e-mail to his clients.
Matthieu Arseneau, senior economist at National Bank Financial Inc., said the authorized lending limit for certain types of insured mortgages (fixed five-year term, for example) could fall by 17 per cent because of Ottawa’s measures. He estimates that 7 per cent of home sales could be affected by Ottawa’s efforts to curb risk in the housing market.
Mr. Siddall said he understands the concerns that some buyers can no longer take out mortgages as large as in the past, but such consumers will benefit in the long term from Ottawa’s “stress test” that uses the Bank of Canada’s higher posted interest rate to determine who qualifies for an insured mortgage.
“We’re not spiking the punch bowl,” Mr. Siddall said. “If we’re making it easy for people to borrow money to buy a house, we’re creating demand, which is only pushing the price higher.”
Ottawa also closed tax loopholes used by some foreign buyers, effective on Oct. 3.
In July, CMHC increased its warning for Canada as a whole from weak to moderate. The Vancouver region has come under increased scrutiny this year. The federal Crown corporation changed its quarterly risk rating on the Vancouver area to moderate in April and to strong in July.
CMHC also saw Calgary, Saskatoon, Regina and Toronto as housing markets that showed strong signs in July of problems looming.
“The housing industry continues to do the heavy lifting for the Canadian economy. I worry that policy makers are looking at what they are doing in isolation. We could end up doing more harm to the most important industry in the country,” said Phil Soper, chief executive officer of real estate firm Royal LePage.
Some industry observers have been sounding the alarm for more than a year about what they view as overheated housing markets in Canada, and the federal agency is the latest to do so. “CMHC is an important voice. Maybe they are late, but is it that important that they are late? No,” Mr. Soper said. “Where CMHC could do more or be helpful is the collection of information such as the influence of non-Canadian and non-resident home buyers.”
B.C. Finance Minister Mike de Jong said “others will have to decide” whether CMHC’s warning shows his government took too long to cool the housing market in British Columbia. Mr. de Jong said B.C. enacted a tax on foreign buyers after it began collecting data that showed they were involved in about one in every 10 Metro Vancouver home sales earlier this summer.
“I think the average citizen would say, ‘Well, why the hell weren’t you collecting this basic data for some time?’ Fair enough, we weren’t. It stopped in the 1990s some time,” he told The Globe and Mail’s editorial board on Monday. “We proceeded to begin collecting that data and when we were in the position to make decisions on the basis of at least a subset of information that was reliable, we did so.”
The B.C. government announced a 15-per-cent tax on purchases by foreign home buyers in the Vancouver area, effective Aug. 2.
“Low affordability and the likely reduction of international capital inflows in the wake of the transfer tax finally end the steep appreciation that started in 2013,” economic forecaster Moody’s Analytics said in a new report, predicting that prices will fall next year for detached houses in the Vancouver region.
Moody’s, which uses data from the Brookfield RPS House Price Indices, envisages a price drop in 2017 of less than 3 per cent for detached houses but cautions a steeper decline is possible.
Rating agency DBRS Ltd. said low interest rates, steady immigration and limited housing supply are among the numerous influences over real estate prices, and there aren’t any simple solutions to improve affordability. “The stream of new government measures introduced this year are expected to contribute to cooling down the market and reducing risks to taxpayers, lenders, investors and to households themselves, although they might be detrimental to economic expansion,” DBRS cautions.
CMHC to issue first ‘red’ warning for Canada’s housing market
Brent Jang,VANCOUVER, The Globe and Mail, Monday, Oct. 17, 2016
Canada’s housing agency is raising the alarm over the country’s real estate sector, warning about a strong risk of problems on the horizon.
Canada Mortgage and Housing Corp. will increase the risk rating in its overall assessment of the country’s residential market to “strong” from “moderate” when it issues a new report on Oct. 26.
“CMHC has recently observed spillover effects from Vancouver and Toronto into nearby markets,”
CMHC chief executive officer Evan Siddall said in an opinion column in The Globe and Mail. “These factors will be reflected in our forthcoming Housing Market Assessment on Oct. 26. They will cause us to issue our first ’red’ warning for the Canadian housing market as a whole.”
CMHC’s decision to issue the red alert has been months in the making. Under the agency’s analysis that looks for “evidence of problematic conditions,” it rates 15 metropolitan markets based on weak (green), moderate (yellow) or strong (red) risk signals.
Earlier this month, federal Finance Minister Bill Morneau announced measures to tighten mortgage rules. Ottawa is also closing tax loopholes used by some foreign buyers.
“High levels of indebtedness coupled with elevated house prices are often followed by economic contractions,” Mr. Siddall said. “We expect Mr. Morneau’s actions therefore to support our economy.
Seen this way, the resulting delay in when people can purchase their first home, or their decision to buy a smaller home, rent or stay put is rather a small price to pay.”
In July, CMHC increased its warning for Canada as a whole from weak to moderate. The Vancouver region has come under increased scrutiny this year.
“A ‘stress test’ using the higher Bank of Canada posted rate must now be used to underwrite guaranteed mortgages. This measure will help offset the highly stimulative effect of low interest rates,” Mr. Siddall said.
The federal Crown corporation changed its quarterly rating on the Vancouver area to moderate in April and to strong in July.
CMHC also saw Calgary, Saskatoon, Regina and Toronto as housing markets that showed strong signs in July of problems looming. Five markets were seen as having moderate risks (Edmonton, Winnipeg, Hamilton, Montreal and Quebec City) while five others were deemed weak for problematic conditions (Victoria, Ottawa, Halifax, Moncton and St. John’s).
The federal agency looks at four key areas of concern: “Overheating, price acceleration, overvaluation and overbuilding.” It cautioned in July that the country’s residential markets as a whole already displayed strong signs of being overvalued.
“House prices across Canada remain higher than levels consistent with personal disposable income, population growth and other fundamental factors,” CMHC said in July. It added that the risk of problematic conditions would increase “if the acceleration in prices intensifies in Ontario and British Columbia so as to outweigh challenges in the oil-dependent provinces.”
The B.C. government announced a 15-per-cent tax on purchases by foreign home buyers in the Vancouver region, effective Aug. 2.
Property sales last month in Greater Vancouver dropped 32.6 per cent from a year earlier, as the housing market adjusts to the impact from the B.C. tax on home buyers in the Vancouver area who are not Canadian citizens or permanent residents.
By contrast, residential sales in the Greater Toronto Area jumped 21.5 per cent in September, compared with the same month last year.