Tag Archives: cmhc
Canadian Housing Will Not Go The Way Of The U.S.
Dale Roberts – SeekingAlpha.com
There’s a lot of chatter today on the Canadian real estate market — that Canada will soon go the way of the U.S. real estate market circa the 2000′s. Those who write such poppycock (been dying to use one of Conrad Black’s favourite words) have not taken the time to read a study or two of the underlying conditions in the Canadian market, compared to the U.S. in the lead up to the mortgage crisis.
First off, let’s be clear. The Canadian market is starting to correct. Housing starts are falling, though average housing resale prices are still holding up relatively well in most areas. Most economists, even those who still view the Canadian real estate market in a positive light, acknowledge that Canadian real estate prices are likely to decline over the next year or two. There is the considerable possibility of a housing “soft landing”.
Comment: The most likely scenario is an overall flattening of the recent rising trends we have seen. Sales volume will settle somewhere near the 10-year average while prices stay close to flat, with inflationary increases. Regional variances, of course, will see Vancouver trend down while Toronto stays hot, for example. Not even sure what a soft landing is anymore, but I guess it is a simple slowdown, a flattening. It is obviously not a crash.
But here’s why Canada is very unlikely to experience a U.S. style implosion.
First off, and most importantly, Canada does not have a Fannie or Freddie Mac or Ginnie Mae. And on that, why do these state owned corporations have such friendly names? I’d prefer Government Owned Agency of Mortgage and Economic Destruction, or something that provides that kind of clarity and honesty. Fannie’s and Freddie’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS). Hmmm? Did a government agency create the infamous MBS? The ultimate weapon of economic destruction? That looks to be the case.
It has never been Canada’s housing policy to encourage or subsidize lending to the lower income Canadians. Private banks (notably Canada’s six largest banks) make loan decisions based on the merit of the home buyers. All income must be verified and the buyer must be in a position to afford a five year fixed mortgage rate. Period.
Which brings us to the root cause of the U.S. mortgage implosion — policy. It was – and is – U.S. government policy to “make” housing available for lower income citizens. It was all during the Great Depression when the Fannie’s and Freddie’s were created. You can blame both parties. As a Canadian, and hence, one who is on the outside looking in, there should be no argument about which party caused the housing meltdown. It was both parties. It has always been both parties.
It is not Republican policy, or Democrat policy, it has been U.S. policy to social engineer and socialize the risk by putting lower income Americans in homes.
I’m not for a second suggesting that there was not a long list of unscrupulous private sector mortgage providers who went on a good ol’ fashioned and unscrupulous profiteering rampage, but government set the conditions and laid the groundwork. And as we read above, they even invented the MBS product.
I’m a big fan of the U.S., I sometimes joke that I’m an American born into a northern nation known as Canada. But in the area of mortgages, the U.S. is more socialist than Canada, or Europe. It’s unfortunate that the land of the free, in the pursuit of the American dream and home ownership, attempted to accomplish the goal by means of government, instead of the free market. Canada is certainly more of a “socialist” country when it comes to healthcare, and … well I guess it’s healthcare and that’s about it. And fortunately we leave the lending to the private sector and our sound banking industry to decide who gets to purchase a home. We do (unfortunately) have a government mortgage insurance scheme, but that is being unwound by our current federal government. Hopefully, one day the government (aka the taxpayer in Canada) will be completely out of the mortgage business.
Comment: The taxpayer never was – and certainly is not – on the hook for mortgage insurance. Everyone who buys a home pays a premium to CMHC or Genworth, that is where they get their funding. Taxpayers give them nary a red cent. And the whole “they are on the hook for $500 billion in mortgages” is bunk as well. They insure those mortgages, all of which have been paid down since they insured them. And the homes the mortgages are on have all gone up. Truly they have about $400 billion in liabilities against properties worth about double or triple that. Even if every mortgage they insure went into default tomorrow, they could sell all the properties at a discount and make a PROFIT! It is not like they are insuring worthless assets…
And on that, the government mortgage insurance agency models of the U.S. and Canada are essentially polar opposites. Canada, by law, has to ensure all mortgages with a LTV (loan to value) above 80%. In essence, when the buyer does not put down more than 20% of the home value, he or she must purchase mortgage insurance. In the U.S., it is essentially the opposite. The Fannies and Freddies of the world insure the LTV’s greater than 80%. The riskier mortgages are not insured.
That’s like insisting that the best drivers on the road who haven’t had an accident in the past 30 years should all be insured, but the 17 year-olds who bang into a few cars every year or two should not be insured.
Here are a few other “facts”. Canadians on average, own over half of value of their homes. Canadian banks are ranked the most solid on the planet. See my article on the “One Stock Portfolio” that details the history of the Royal Bank of Canada and the Canadian big banks as an investment option. Canadian banking operates under a unique oligopoly situation where the “Big Six” rule – and profit. Those six banks are Royal Bank of Canada, Toronto Dominion Bank , ScotiaBank, Bank of Montreal, Canadian Imperial Bank of Commerce and The National Bank of Canada.
And according to a friend of mine who holds a very senior position in a major Canadian bank, here’s the number one reason why Canada cannot have the same experience as the U.S. housing market meltdown.
Our market cannot and will not freeze up, as it did in the U.S.
In the U.S., almost half of the mortgage market simply went away. That sent shock waves throughout the entire U.S. mortgage market. One of the key and damaging characteristics of the U.S. real estate meltdown was the inability to get a non-conforming (higher risk/subprime) mortgage. Some 30-40% of the U.S. mortgage market completely closed. It disappeared. Many people had non-conforming mortgages in the U.S., either due to high loan to value, due to large mortgage size, or poor underwriting criteria. In Canada, even if there was a significant pull back in house prices, CMHC (Canadian Mortgage and Housing Corporation) will still be available to insure high LTV loans. And Canadian banks can pay CMHC to have them insured at their discretion.
So it is difficult to imagine any reason for banks to stop lending any form of mortgage that exists today. While it’s cold up in Canada these days, the mortgage market is not about to freeze up.
Comment: Heck no! Not when our banks are making billions in profits, billions. And mortgages make up 20-40% of that profit. They have a rather vested interest in making sure they keeping handing out mortgages, strict rules or not.
We simply don’t do a lot of subprime. For that reason alone, the risk of a major Canadian “housing bust” is greatly mitigated, at least compared to the U.S. experience. Also, you cannot simply walk away from your mortgage and debt responsibilities in Canada. They have laws against that sort of practice. LOL!
Comment: The US had 30-40% of their mortgages as subprime, Canada has something like 4%. Andour default rate just fell again, to 0.31%. That is only 3 out of every 1,000 mortgages defaulting – and they are all insured.
If a mortgage does run into arrears, Canadian banks do not have a stay period of 90 days (or any extended lockout periods) to foreclose on that mortgage. They can swoop in and immediately take care of their investment. Once again, the private sector does its thing. If you can’t pay your mortgage, banks will take back the property and then go after your future earnings.
In Canada, there also is no incentive to over leverage to take advantage of the mortgage tax deduction. A mortgage does not qualify for a tax deduction in Canada. Canadians take on a mortgage and in most cases try to get rid of it as quickly as possible. There is very limited use of teaser rates in Canada.
Canadian banks are not forced to lend to lower income applicants, such as the coercion that exists in the U.S. CRA, the Community Reinvestment Act that mandates banks (okay, okay — “encourages”) to lend a certain percentage of their book to low income communities.
And a few points from a paper by Avery Shenfeld of Canadian Imperial Bank of Commerce. The speculative activity in Canada is well below that of the U.S. (when they were heading into the meltdown). Housing starts in Canada have recently been about 10% above household formations. In the U.S. it was 80% of household formations. That’s drastic to say the least. Non-conforming mortgages in Canada for 2012 are just above 5%. In the U.S. they were well above 25%. The number of negative equity position mortgages in the U.S. in 2005 and 2006 was one third, even before the price drop(s). In Canada, the negative equity position is zero, according to CIBC.
It should be very clear, that Canada is not the U.S. when it comes to the mortgage industry, and situation. It’s just not apples to apples. It’s more like apples to maple trees.
Given the strengths and precautions outlined above, it’s possible (but not guaranteed) that Canada can engineer a soft landing. That’s difficult for sure, but the current government has been tightening lending regulations, and our Central Bank has been trying to talk down Canadians, warning them of the risks of high debt levels. Some steam is coming out of the market. Falling and stabilizing home prices, is a healthy event.
Comment: Why do we have to have a soft landing, or landing of any sort? Prices for most things always rise over time, be they houses or cars or chocolate bars. Movies used to be a nickel for Grampa, remember?
And as I wrote in the “One Stock Portfolio” article, I still think that Canada’s big banks are a great place for Americans to invest (long term) and Canada sits in a very unique place, full of opportunity with exposure to the U.S. and emerging market growth. Canadian banks are worth a look. Just recently, they’ve reported some incredible numbers. Royal Bank led off the Canadian Banks’ earnings season with fourth-quarter profits that rose 22% to $1.9 billion. RBC also reported record profits for the year.
A U.S. style mortgage market meltdown in Canada? Don’t bank on it, eh.
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Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–
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Canada Housing: Correction Ahead Or Soft Landing?
Analysts Waver; National Housing Agency Denies Major Problems
Courtney Tower – Market News International
High up in housing, in the condominiums of some of Canada’s largest cities, there may or may not be overheating and corrective troubles ahead. Down on the ground, in single-family dwellings, no Canadian market correction looms. These are the disputed prospects in the wake of new housing activity data.
Comment: And the funny part is that condo prices are moderating here in Toronto, while houses are going crazy. Some neighbourhoods have 70% of houses for sale going for over asking. That would be the soft and slow correction everyone is talking about – for condos.
Most analysts have argued that Canada is not at risk of anything like a United States-style crash in housing, but some now seem to be wavering while others continue to see activity ratcheting down gradually.
Comment: Anyone looking can see it. Vancouver is slowing down, Toronto condos are moderating. Time for a deep breath and some relaxing.
Canada Mortgage and Housing (CMHC), the national housing agency, took the step Tuesday of denying in a report specific concerns cited by Finance Minister Jim Flaherty that Canadians may be over-mortgaged or that CMHC’s mortgage insurance and securitization practices flirt with danger.
Opinions differed followed CMHC’s monthly report Tuesday showing housing starts in April surged by 14% to a seasonally adjusted 244,900 units from 214,800 in March. It was the highest level since pre-recession days of September, 2007, and was all about condos. They made up by far most of the increase.
Comment: Sure, lots of condos are being built, but the increased supply is moderating prices – just as simple economics would expect. Condos in Toronto have become the new rental market, a big driver of the new development sales. That and ever-rising prices are pushing first time buyers into condos as opposed to houses. People want to live downtown, close to work for a shorter commute, and near to the restaurants and bars they like to play in. It really is not surprising. As the city evolves, the core becomes more and more appealing for more and more reasons.
Single unit starts, which analyst Dina Cover of TD Economics terms “a more stable indicator of the overall health of the housing market,” edged up 0.6% to reach 67,700 homes at an annual rate seasonally adjusted.
The day before, Statistics Canada reported that home building intentions for March dropped by 1.3% to $3.9 billion at the seasonally adjusted annual rate, for this sector’s third consecutive monthly decline. Taken month over month, single family dwelling permits fell by 1.7% in March from February.
David Madani, Canada economist for the international firm Capital Markets, has long been one of the few predicting a savage housing market correction of about 25% over an undefined period of time and starting at an undefined time. He told MNI the April starts only confirm his view that the housing market “is out of control” and headed for a deep correction, at some time ahead.
Comment: What? There will be a correction at some point, lasting some sort of time… that is truly the stupidest “prediction” I have ever read. It is also impossible. Given an indefinite amount of time, all prices rise. It is called inflation. Cars, chocolate bars and houses – they all cost more today than they did 10, 20 or 30 years ago. Houses will NEVER drop 25%, not over any period of time.
Other analysts are not so sure. Emanuella Enenajor, at CIBC Economics, told MNI she expects a drop in starts shortly from April’s elevated numbers, but no large fall for Canada’s housing market this year at least. The market would be held up by continuing relatively strong Canadian economic performance overall and rising employment, she said.
Comment: There might be local dips, and Vancouver could drop significantly. That would affect the national average and send people running screaming for the hills. But it would mean nothing in most local markets.
The April surge in starts has the effect of “putting to rest any doubts that Canada’s housing market, at least in certain sectors and cities, is at risk of overheating,” Robert Kavcic, economist at BMO Capital Markets, wrote in a research note.
“The bubble-mongering that has been going on seemed overplayed for sometime given that housing starts were running only slightly above household formation (about 180k) on average, for the past three years. But that is no longer true, with starts now moving well above underlying demand, and accelerating in recent months,” he added.
Comment: Could that not mean that starts were behind household formation for a while and being just above for 3 years did not do enough to satisfy demand? If no one needed the housing, why would it be built? In Toronto, owned properties are all occupied and rentals are running around 1.3% vacant. So housing demand is so strong that (using the 50-50 rental to owned ratio) less than 2/3rds of 1% of Toronto housing is vacant. We are talking 0.65% – or less. That would strike me as extreme demand.
Kavcic noted that “the trend away from building detached homes in favor of condos continues unabated, particularly in Toronto, Vancouver and Montreal.” His bottom line: “There’s little question now that Canada’s residential construction sector is heated, with the big-city condo market boasting the highest temperature.”
Comment: For so many reasons, from price to good urban planning. Look at all big cities, world cities even, and see the density of housing in the downtown core. Toronto is just catching up.
Jonathan Basile, economist at Credit Suisse in New York, wrote that the April starts are “the first housing indicator to get us worried about a correction.” Credit Suisse, he said, “lean in the correction camp.” The correction would come from the multi-unit sector.
Comment: Seriously? People have been whining and worrying about the Toronto condo market since I first started reading about it in 2003. And that is just when I remember noticing it. And for 10 years now, Toronto keeps getting new condos. For half that time we have 140-some-odd projects on the go. We did in 2006 and we do now. Big whoopee, this is not new and certianly is not news.
Basile noted that multi-unit starts were 65% of total housing starts in April, “well above the long-run average of 42%. There was only one other episode — late 1981/early 1982 – when multi-unit starts made up such a large share. What followed was a sharp correction.”
Comment: But the long term average also includes the period of intense urban sprawl. That trend is reversing and much more housing is occurring vertically and not spread out across the fields. The long term average is moot in this case, as housing trends completely change. Look at condos in the 905 – where once was only houses, now there are towers. Not seeing that is incredible.
Dina Cover at TD Economics said the multi-unit surge probably is not sustainable and there could be “some give-back in the coming months.” However, Cover expected that overall homebuilding activity should remain healthy this year“as builders work to complete projects before the Bank of Canada begins to hike interest rates – a move we expect to take place in September.”
Kirsten Cornelson, economist at RBC Economics, said high pre-sales of urban multiple units in 2011 indicate “that strength in the housing market is being supported by increases in demand.” Nonetheless, she said, RBC expects “that there will be some easing in the coming months to a more sustainable pace of growth.”
Comment: Shocker! All of these condos are being built – wait for it – because people want them! And are paying for them! Who would have thought…
At the same time, CMHC authored a comeback, without directly saying so, against Canadian Finance Minister Jim Flaherty’s assertion that he has been worried for some time about the amount and quality of CMHC insurance of home mortgages, and about CMHC’s securitization of mortgage packages.
Flaherty put the insurance and securitization activities of CMHC under review by the Office of the Superintendent of Financial Institutions (OSFI) and put OSFI on CMHC’s Board of Directors.
Karen Kinsley, CEO of CMHC, said in the 2011 Annual Report that the agency turns a high profit on its mortgage insurance portfolio without cost to the taxpayer. Mortgage loan insurance “accounted for most of CMHC’s net income of $1.529 billion, which helped improve the Government of Canada’s fiscal position,” the report said. CMHC had turned over to the federal government $16 billion since 2002, it said.
Comment: For all those worried about everyone tanking and needing a bailout from the CMHC – read the paragraph above again. And again. Their NET income last year was over $1.5 billion. They MADE $1.5 billion. Because we don’t default on our mortgages. They have enough money that they have given the feds $16 billion in the past 10 years? With and average property price of $350,000 and 10% down, that means they have insured 2,539,683 mortgages without a single problem. Who is worried about our real estate market? In the US during the peak of their meltdown, they had default rates in the 30% range, some areas up to 60%. We are more than 75-150 times lower than that, at 0.41%. And with a population 10 times lower, than means 750-1,500 times fewer absolute defaults. Three orders of magnitude lower. And that is why we cannot be compared to the US.
CMHC maintains “more than twice the minimum capital required by OSFI” of mortgage insurers, and so is “well positioned to weather possible severe economic scenarios.” Answering concerns that homeowners are becoming over-extended, the report, and a media briefing by conference call with CMHC officers, said “the majority of homeowners loans have strong credit scores” and households manage their mortgages prudently.
Comment: A Toronto mortgage broker recently released a study showing their average applicant made $125,000/year and wanted a loan of only $262,000. And consumer debt is growing at essentially 0%, the lowest rate since 1992.
The briefing said 75% of high-ratio loans approved were fixed rate mortgages,” when a major contention of critics is that when rates inevitably rise from their extended lows many households will be very vulnerable.
Comments: Yet another reason why the “run for the hills because mortgage rates are going up to 93%!!!” arguement does not hold much water.
The average outstanding loan amount per household was $162,157 in 2011, and the arrears rate for all CMHC-insured loans was 0.41%, they said.
Against concerns that CMHC is nearing its limit of C$600 billion in the worth of mortgage loans that by law it is allowed to insure, the agency said total outstanding loan guarantees in force come to C$362 billion.
Comment: Wow… that is not even close. That is just over half. And they make $1.5 billion a year.
CMHC is by far the largest insurer of home mortgages in Canada and says 46.5% of that business is in insuring mortgages the private sector tends not to insure, including large multi-unit rental properties such as nursing and retirement homes and homes in rural areas and smaller communities.
“A total of C$116.7 billion in securities backed by insured residential mortgages was guaranteed by CMHC in 2011,” the agency said.
House prices in Canada do not exceed levels supported by underlying factors such as high immigration, growing incomes, low interest rates, the CMHC report said. “Based on these and other characteristics, clear evidence of a bubble is lacking,” it said.
Comment: And that, my friends, is the sum of it.
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Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–
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Government is to blame for Canada’s housing bubble
Jesse Kline – National Post
Canada’s housing market has been relatively stable over the past year, with the notable exception of Toronto, which has overtaken Vancouver as the country’s hottest real estate market. Prices in Canada’s largest city have risen 10.5% over the past year and there are now three times as many cranes dotting Hogtown’s skyline as there are in the Big Apple.
Many analysts are becoming increasingly concerned that some cities — notably Toronto, Vancouver and possibly Calgary — are in the midst of their own U.S.-style housing bubble. A document written by the country’s financial regulator and obtained earlier this year through an access to information request, expresses concern over the “emerging risk” of Canadian loans that “have some similarities to non-prime loans in the U.S. retail lending market.” Bank of Canada Governor Mark Carney continued to sound the alarm as well last week over the growing level of household debt, while maintaining the overnight lending rate at a near-record low level of 1%.
Comment: Huh, what? We have loans that look like sub-prime ones? Seriously… No, we don’t. Well, we do – we have about 0.2% of our mortgages in that sort of area. As in 2 out of 1,000. That does not weigh very heavily on my mind, nor should it on yours.
The question remains as to why prices in Toronto and Vancouver — where the economy is stagnant — are rising so fast, and not in cities like Edmonton and Saskatoon — where the economy, and population, is booming. Financial Post columnist Diane Francis caused quite a stir recently, by arguing that the Canada Mortgage and Housing Corporation’s (CMHC) policies have led to a “deluge of hot money from abroad that is creating an artificial and potentially dangerous real estate bubble.” Her solution: “A ban on foreign buying of residences.”
Comment: Wrong. Toronto’s economy is anything but stagnant. Incomes are rising and we are the center of the app development world. There is a reason 110,000 people immigrate to this city every year. Vacancy rates are low, home ownership rates are high. There is a lot of money in Toronto and it grows every year.
Ms. Francis is at least partially correct. The CMHC controls a majority of our mortgage insurance and security markets, and guarantees 100% of the principle and interest on insured residential mortgages. Meanwhile, the Bank of Canada has maintained interest rates at artificially low levels, which only serves to temporarily inflate the market, instead of allowing any correction that would take place under normal market conditions. These two policies make Canadian real estate a very attractive investment — for both foreign and domestic buyers.
Comment: The BoC has kept the prime rate low, which affects variable rate mortgages. It does not influence fixed rates. That is the bond market, which the government does NOT control. And the market was booming as much as it is now a few years back, when rates were higher. In fact, 2007 still stands as the record year for sales volume – when mortgage rates hit 6.75%. So it ain’t rates baby!
But saying that foreigners are wholly responsible for creating a housing bubble is nothing more than fear-mongering, with people who don’t look or sound like us, being cast as the boogeyman. After all, what’s wrong with foreign investment? Foreigners bring money into the country, which creates jobs and drums-up business here at home. Developers make money, construction companies hire employees and buy capital equipment, the rental supply increases and local businesses profit the whole way through. It’s a win-win for everybody.
Comment: The foreign money is going more into $300,000 new condos from builders. That is certainly not pushing prices up in any appreciable way. The Bugaboo mafia and their stab-you-in-the-eye bidding wars are the main driver of prices increases in Toronto. One bungalow in North York does not a trend make. And the very idea is racist and wrong and offends me to my core.
The Statue of Liberty calls for “your tired, your poor, your huddled masses.” If we were smart, we’d engrave the CN Tower with a call for “your innovations, your money and your wealthy investors.” We should want to be known as a country that welcomes investment.
Comment: We are – and look how it benefits us!
What we don’t want is an artificially inflated housing market that will bring the whole economy crumbling down when the bubble bursts (see the United States, circa 2008). But if some parts of Canada are indeed in the midst of a housing bubble, the blame can be placed squarely on government policy.
Comment: But it is not artificially inflated. Anyone who says that has nothing to back it up. To compare Canada or Toronto to the US of 4 years ago is misleading and kind of dumb. They had sub-prime issues, we do not. They were bleeding money fighting wars, we are not. They were losing jobs, we are gaining. I could go on, but the only similarity between them and us is the fact that we are noth part of North America.
By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans. And although the government has tightened lending standards recently and may do so again in the near future, a report from the Reason Foundation in the U.S. found that government guarantees always under price risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Government simply cannot price risk accurately; while private lenders, if unencumbered by market-distorting policies, have every incentive to price risk appropriately.
Comment: Easy to get loans? Are you serious? Ask my clients how easy it is… Or go try it for yourself. Our banks are evil and stingy with their money. They really do make people jump through hoops and are very careful who they lend to. That is why our default rate is barely 1 in 1,000, if even that. Our banking system is the envy of the world and our mortgage system is solid as a rock.
In order to prevent a U.S.-style housing bubble, we should not hang a “closed” sign on our border and prevent inflows of capital; we should instead push to privatize the CMHC and allow private companies to assume the mortgage risk, instead of the taxpayer. We also need a monetary policy that allows interest rates to rise and fall with market forces, instead of at the whim of central planners.
Comment: Hear, hear! I like the idea of more private mortgage insurers. We do have GEMI already, CMHC is not the only game in town (which this writer either ignores or does not know). But other insurers would soften the risk to the government.
Only by removing policies that artificially inflate the market in the short term, will we be able to create a real estate market that is sustainable in the long run.
Comment: What policies are these? The prime lending rate? That is the only thing the government has control of. The market is what it is because of the 1,000,000 buyers, sellers and their agents that exchange properties every year in Canada.
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Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–
Incoming search terms
Related posts:
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