Few in the real estate industry in Canada shed a tear when Evan Siddall stepped down as director of the Canada Mortgage and Housing Corporation in April after seven years of teaching them, among other things, about their greed.
To his credit, Mr. Siddall felt compelled to speak out against what he saw as the irresponsible practices of realtors, lenders and policymakers who encouraged Canadians to take on increasing mortgage debt. That he did so with all the subtlety of a jackhammer, however, only undermined his influence.
Mr Siddall angered Canadian bankers with a direct letter he sent last August criticizing lenders for avoiding CMHC in favor of private mortgage insurance providers after the federal agency tightened the criteria for eligibility to prevent borrowers from taking on too much debt. The outspoken CMHC feared that the lowest interest rates would encourage buyers to take on debt, which would make them and the entire housing market vulnerable when rates rise inevitably.
“We have maintained a reduction in our market share to promote a more competitive market to your advantage. However, we are approaching a minimum level of market share that we need to be able to protect the mortgage market in times of crisis. We need your support to prevent further erosion of our market share, ”Siddall wrote at the time. “If you want us in wartime, please support us in peacetime.
The letter passed like a lead balloon. Not only did the mortgage lenders ignore Mr. Siddall’s arguments, but they transferred even more of their activities from CMHC to private insurers Sagen MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., which maintained eligibility criteria. more flexible for borrowers who make a down payment of less than 20% to buy a home. In the first quarter of 2021, CMHC saw its share of new underwriting business drop to 23% from nearly 50% a year earlier.
Romy Bowers, Mr. Siddall’s successor at CMHC, wasted no time trying to repair the damage. This month, it removed the restrictive eligibility criteria Mr. Siddall put in place, lowering the minimum credit score and raising the maximum debt ratios borrowers are allowed to maintain to qualify for insurance. CMHC.
“We are taking this action because our July 2020 underwriting changes were not as effective as we expected and we incurred the cost of declining market share. Healthy market share is an important consideration as it helps us meet the financial stability aspect of our mandate, ”CMHC said in a July 5 release announcing the move.
Mr Siddall clearly miscalculated if he believed that CMHC’s moral suasion would be enough to persuade real estate players to dampen their enthusiasm as the federal government and the Bank of Canada continued to pump record amounts of liquidity into the markets. financial resources during the pandemic. With the exception of the Office of the Superintendent of Financial Institutions, which toughened its own mortgage crisis simulation in June, policymakers in Ottawa had worked against the grain with CMHC by injecting stimulus energy into a real estate market. who didn’t need it.
This resulted in a 26% year-over-year increase in the average price of a typical Canadian home in June. This was down from 38 percent in May, as the extraordinary price increases of the previous months showed signs of moderation. Prospective buyers are rightly becoming reluctant to buy at the top of the market, especially as many economists predict that the Bank of Canada will begin to tighten monetary policy sooner than expected.
Yet the Canadian real estate market remains dangerously overheated and it may not take much to suddenly change direction.
“With the effectiveness of monetary policy much greater than at any point in the post-war period due to record levels of household debt, a relatively small rate hike could have a noticeable impact in the market, ”said Benjamin Tal, CIBC economist. wrote in a July 16 report co-authored by William Johnston of Equifax.
The report notes that while the average mortgage loan amount for first-time buyers increased 19% in the first quarter of 2021, monthly payments only increased 3.7%. “Over the longer term, however, there are concerns that rising mortgage values in low-income areas will be a challenge as interest rates rise,” they wrote.
The long-term consequences of excessive mortgage debt were precisely what Mr Siddall warned against when he sent his letter to lenders almost a year ago, saying there was a “dark underbelly.” In their business that he sought to exhibit.
“The economic cost of COVID-19 has been deferred by effective government intervention; it was not avoided ”, explained Mr. Siddall at the time. “Excessive household borrowing will exacerbate the pain of the delayed economic adjustment from COVID-19. “
His warning fell on deaf ears. At the end of the day, CMHC may not be the only one paying the price.
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