We all know that CMHC does not insure mortgages of over $1,000,000, and for a couple of years now, we’ve been working in a market where you must make a minimum downpayment of 20%.
But a colleague and I had a spirited debate the other day about what other changes CMHC could make, and what kind of effect that would have on the market.
Of course, that begs the question: is it CMHC’s job to regulate the real estate market, or simply to provide mortgage insurance?
These “what if” scenarios always stir up a lively debate, and some great feedback from my astute readers, but one of my friends said to me the other day, “What’s the point in even discussing if it’s never going to happen?”
It’s a bit of a defeatist attitude, I suppose.
He told me, “Don’t get me wrong, I love reading your blogs about “what if” interest rates were at 8.99%, and the effect that would have on the market, but that’s N-E-V-E-R going to happen!”
Never is a long time, and I think he means that in today’s economic climate, it’s not anywhere remotely on the horizon.
The Toronto Maple Leafs will win the Stanley Cup again, won’t they?
I mean, I’m sure people said in the 1950’s, “The Boston Red Sox will win the World Series again,” and then they said it once more in the 1960’s, again in the 1970’s, repeated themselves in the 1980’s, once more in the 1990’s, and then just like that…BAM! World Series Champions, 2004.
So why can’t interest rates be at 8.99% again for a 5-year-fixed? Why can’t we talk about it?
Alright, I see my buddy’s point. He suggests that many of the “hypotheticals” we discuss are fruitless, since they’re so far gone.
But on the contrary, I think it keeps the mind sharp.
I think knowing the market inside and out is helpful, no matter how far off the ideas examined.
Case in point, the colleague who said to me, “What do you think would happen if CMHC stopped insuring mortgages over $900,000, rather than $1,000,000?”
Honestly, it’s something I’ve never given any thought to. I don’t think it’s going to happen, but the debate that continued was interesting.
Before we delve into that, however, how about answering the question I brought up at the onset: What is, or should be, the CMHC’s job with respect to the real estate market?
On the most basic level, their job is to provide insurance for mortgages.
But their ability to make wholesale policy changes can completely reshape the market, and they act almost like a regulator, in a way.
With even more powers, they could essentially be the God of the real estate market, determining the fate of mankind.
Now a person with a better understanding of government might point out that it is the Finance Minister who makes suggestions to CMHC for how to implement policies, and thus it’s really a top-down approach from the Canadian government. But then it’s just another, different “God” that can reshape the Canadian landscape, if he or she so chooses.
Well we won’t get into the “what if every buyer had to make a 50% down payment” doomsday, what-if scenarios today.
But I did want to talk about the idea of the mortgage insurance ceiling at $1,000,000 coming down, even if it’s simply for the point of discussion.
I personally believe that when the CMHC stopped insuring properties of over $1,000,000, and thus buyers had to make a 20% down payment on those properties, it put a tremendous amount of pressure on the $800,000 – $999,999 price point, and if there was any hope that the policy change would help cool the market, it backfired.
I saw the $600,000 houses go to $650,000 overnight, and to $800,000 within two years.
The market under $1,000,000 went nuts, and it continues to be the hottest segment of the market.
When my clients purchased a house for $1,006,000 a few weeks back, amidst twelve offers, there were two bids of exactly $999,999 from buyers who had only a 5% down payment, and couldn’t afford to go any higher.
So “what if” that magic $1,000,000 mark was brought down to $900,000? Or to $800,000?
I think the effect would be obvious, and those house prices might cool.
But I also think it would simply put more pressure on the $600,000 and $700,000 houses (what’s left of them), and believe it or not, I think it would start a run on condos.
I know it sounds nuts to say this, but there’s a shortage of “quality” $700,000 condos in the downtown core. There’s a TON of junk, but not so many places that I’d consider selling to my own clients. Trust me – I was out on Saturday, and again on Tuesday night, showing $600 – $900K condos, and most of them were “walk in, walk outs.”
Now in this “what if” scenario where CMHC only provided mortgage insurance up to $800,000, I think a lot more buyers would be looking at condos in the downtown core, where they can still make a 5% down payment. That, in turn, would probably cause prices to rise in this segment, whereas they might level off for houses over $800,000.
It’s amazing how much of an effect the CMHC could have, if only they wanted to.
I’ll go on record saying that I don’t ever expect the CMHC to lower that magic $1 Million mark, but let’s examine a different idea: what if we used a sliding scale?
Well consider that CMHC already uses a sliding scale for their mortgage insurance premiums, as follows:
(FYI – the traditional CMHC premiums start at 80% LTV)
So what about a sliding scale for down payments?
“What if” the scenario looked like this:
5% down payment for purchase price $0 – $400,000
10% down payment for purchase price $400,000 – $800,000
15% down payment for purchase price $800,000 – $999,999
20% down payment for purchase price $1,000,000++
I’m in no way advocating for this, nor do I think it’s going to happen.
I also think that lenders would be lined up left, right, and centre to provide second mortgages. Traditional banks, credit unions, Alt-A lenders – they’d all be trying to ensure buyers can still purchase with only 5% down, by providing loans for the balance, so perhaps that’s another reason why this sliding scale would never be a reality.
But I also don’t really think my idea is all that creative, and yet it’s the first time I’ve ever really discussed it.
I’ve heard some suggestions that CMHC should raise the minimum down payment to 7.5% from 5%, or even to 10%, but that’s not going to accomplish much.
And it’s equally as fair for somebody to suggest that they lower the minimum down payment to 0%, or even offer 107% financing as lenders did back in the early 2000’s. Remember that everybody has a different risk tolerance, and while some people want as little debt as possible, others laugh at these 2.34% variable rate mortgages and wish they could get 107% financing so they could invest their money in a vehicle that returns 10, 15, or 20% per year.
Of course, we’ll always need legislation to protect us from ourselves. That’s why it has to be illegal to drive drunk, rather than just common sense. Or even illegal to drive without a seatbelt for that matter.
It seems that “debt” has become a bad thing, and the government has taken steps to reduce it, make it harder for us to access it, and force us to use more of our own money, rather than borrow from others.
I don’t think CMHC should be looking to make wholesale changes to the mortgage industry in some sort of pointed attempt to change the real estate market.
The 20% down payment on $1,000,000 had the unintended consequence of lighting the market under $1M on fire, and I truly believe that any other changes have the possibility of backfiring as well.
I think we’re going to see little to no changes from CMHC and the Finance Minister for at least 18-24 months, if anybody’s asking me.
And would you not all agree that there’s a better chance that rates drop than the chance that rates actually rise?
Time will tell…