Should The Federal Government Act On Uninsured Mortgages?

When we talk about mortgages or mortgage insurance, we usually only ever talk about insured mortgages, since those are the ones covered by by CMHC, and we the tax-payers are on the hook for these loans.

Most of the changes to the mortgage world are brought about by CMHC, and only affect insured mortgages.  But is it time the government looks at further restricting uninsured mortgages?

In a Globe & Mail article from a couple weeks back, the heads of Genworth and Canada Guaranty suggest the time indeed, has come…

PeaceTower

Think of all the “big changes” that have come about in the Canadian mortgage market over the past few years.

The last one, the biggest we’ve ever seen, raised the minimum down payment on the value of a property between $500,000 and $999,999 from 5% to 10%.

Double.

Double anything is a big deal.

That change had been long-rumoured, and yet everybody was caught by surprise when it was enacted earlier this year.

How about the days of 40-year amortization?  Those are long gone!  Once upon a time, and unlike the fairy tales, “once upon a time” means only a few years ago, you could get a CMHC-insured mortgage amortized over 30, 35, or 40 years, thus decreasing your monthly payment, but increasing the amount of interest you would pay.

And remember when mortgage insurance premiums were lower?

The premium on loans with down payments from 5% to 9.99% went from 3.15% to 3.60% in June of 2015.

45-basis points might not sound like a lot, but consider the first-time condo buyer who purchases a $400,000 condo with 5% down.  Under the old premiums, he or she would pay $11,970, and under the new premiums at 3.60%, he or she pays $13,680.

You can only imagine what those numbers look like when you start talking $800,000 houses…

All these changes, and yet, the market here in Toronto has yet to cool.

I think we all know that when new mortgage legislation is enacted, the intent is to cool the market.  Changes in 2008 might have been proactive, after having seen the American mortgage crisis, but any changes in 2016, or in 2014 or 2015 for that matter, had one clear goal, and that was to stop the market from increasing.

in any event, none of it has worked.

And the government, and CMHC, are starting to look like they have absolutely zero impact on the market.

My fear, along with many others’, is that the government will overreact and do something drastic.

I mean, raising the minimum down payment from 5% to 10% for properties between $500,000 – $1M is pretty drastic, but I’m talking about something even larger, or more impactful.

There was an article in the Globe & Mail two weeks ago called, “A Warning On Mortgage Insurance Restrictions.”

In the article, the CEO’s of both of Canada’s private-sector mortgage insurers (with CMHC being the “public” insurer), Genworth and Canada Guaranty, suggest that targeting first-time home buyers will do little to slow prices.

Both men believe that the increase in down payment from 5% to 10% were aimed at Toronto and Vancouver, but that in the end, it hurts first-time buyers, and buyers in other markets.

Stuart Levings, CEO of Genworth, says of the effect on the Calgary market, “What was already a somewhat challenged market, now with that extra down payment requirement has just killed it even further.”

Andy Charles, CEO of Canada Guaranty, says that first-time home buyers make up roughly 30% of the Canadian housing market, which is down from as much as 50% in the past.

More changes to the mortgage market are coming if the market continues to rise.

Federal Finance minister Bill Morneau is putting together a “working group” to study the Canadian housing market, who will submit a report to the federal government by the fall, with recommendations on what, if any, actions should be taken.

You know me – I say, “Oh, good, another group/panel/committee/board will be created, to commence a ‘study’ that will cost tax-payers millions of dollars, so ‘findings’ can be submitted.”

But what else is the government supposed to do?

They’re out of ideas.

B.C. Premier Christy Clark is blaming the real estate industry for prices in Vancouver.  What else is she supposed to do?

The word “crisis” is increasingly being used along with “real estate.”

John Bruk wrote a fantastic piece in the Globe last week called, “Canada’s Housing Crisis: The Time For Study Has Passed.”

In the article, Bruk basically blames government inaction, and a “wait and see approach” by all three levels of government, who have sat back and done nothing as prices have skyrocketed.

Bruk makes suggestions for change – all of which have to do with foreign ownership.

But there is one more change the government can make before going the foreign route, and that has to do with those uninsured mortgages that we never talk about.

We’ve seen insurance premiums raised, down payments for insured mortgages raised, and amortizations for insured mortgages lowered – but nothing with respect to those insured mortgages.

Homes valued above $1,000,000 and second properties and/or investment properties don’t qualify for mortgage insurance, and buyers with 20% down payments under $1M don’t need mortgage insurance.

So is it time the government takes a kick at that can?

Is it time the government raises the insurance floor from 20% to 25%?

Is it time the government eliminates 30-year amortizations for uninsured mortgages?

Is it time the government raises the minimum down payment over $1,000,000 from 20% to 25% or even 30%?

Should there be a massive sliding scale for homes over $2M or $3M?  Say, the 20% down payment rises to 40% for the portion above $2M?  Or are we naive enough to think that every buyer of a $3M home is doing so in cash?

Personally, I don’t like these ideas.  But I’m putting them on the table for discussion because I know the federal government soon will.

Again, from the Globe & Mail article, the CEO’s of Genworth & Canada Guaranty suggest that the maximum 25-year amortization for insured mortgages should be matched by those of uninsured mortgages as well.  Currently, borrowers with 20% down can get a 30-year amortization, thereby lowering their monthly payments, and making purchasing more affordable.

The CEO of Genworth also suggests that the minimum down payment for uninsured mortgages should be raised from 20% to 30%.

But are these guys making suggestions on what’s best for the country, or the real estate market?  Or are they making suggestions that will help Genworth and CG make more money?

I don’t believe that any more changes can come to the market for insured mortgages.

Premiums at 3.60% for those with 5% down are already bloated.  They can’t go any higher.

The down payment minimums can’t be raised anymore.  Can they?

The maximum 25-year amortization can’t be lowered.  That would be ludicrous.

But if the government still wants to believe that it can cool the red-hot real estate market through legislation, they’re either going to have to make more changes through CMHC, or finally increase the down payment for uninsured mortgages.

Of course, they could tackle foreign investment, but I fear that’s difficult, and the government historically doesn’t like “difficult.”  It’s much easier to stick to what you know, and what you can control, and the Bank of Canada controls CMHC.

So let me post the simple question, with the seemingly obvious answer:

Which of the following should the government act on:

1) CMHC-insured mortgages
2) Uninsured mortgages
3) Foreign purchases

20 Comments

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  1. Free Country says:

    Thanks for this David, the idea of raising the minimum down payment for homes over $1 million to 25 or 30% (or, as you suggest, going further, say 35% if over $2 million) has a lot of merit if the goal is to cool the housing market in Toronto and Vancouver – which I think is the goal (though some commentators seem to disagree with that stated goal). Two further aspects to hone this idea:

    1. The extra downpayment should only apply to the excess above $1 million. Otherwise, a downpayment for a $999,999 house would be $199,999.80, but the downpayment for a $1 million home would jump to $250,000. This would create “gaps” in the market (similar to the UK housing market for many years, where stamp duty bands meant no houses priced between GBP499,999 and about GBP 600k). Taking this one step further, this militates in favour of a significant increase i.e. to 30 or 33% of the excess, in order for it to “bite.”

    2. This calls for the “smack of firm government”. Once decided, there should simply be a midnight announcement that applies to any deal signed afterwards. No long waiting period before the new rules come into force — because otherwise, buyers who cannot afford the new, increased down payments will simply stampede into the market and buy frantically before the new rules come into effect.

    Thank you.

  2. Clifford says:

    The government has no clue how to solve the problem. They made rule changes and basically making it harder for 1st time home buyers. The rule changes do not really affect the guy who’s sitting on a house that has quadrupled in value. It is killing those 1st time home buyers that are trying to put together $20K for a downpayment and then other $ for closing costs.

    Foreign buyers are unaffected… But there are other factors at play here, one of which is lack of product. People aren’t selling.

  3. AndrewB says:

    Christy Clark’s comments about the BC market is hilarious when everyone has been criticizing her for going on numerous Asia trips and literally inviting foreign investment right into her backyard.

  4. Joel says:

    I think that the government needs to tackle this problem from the opposite end. They need to offer incentive to developers that build low rise condos and townhomes in areas outside of the core.

    There are so many people looking to buy and not enough people willing to sell. Adding senior focused housing options in the neighbourhoods that they already live in will help to encourage them to leave their houses for condos.

    More affordable and enticing housing options in each individual neighbourhood (instead of only in the core) would help to free up homes and provide other more affordable options for families.

    1. Kyle says:

      Totally Agree.

      The issue with trying to manage prices by reducing demand, is that the majority of property buyers also happen to be selling a property to finance their move. So if you crimp demand you are also crimping supply.

      Toronto is a world class city that attracts tens of thousands of new people every year, prices are rising because all the land is built upon. However despite all the new condos, the City is still mostly low density. If the City allowed more intensive use of the land that would certainly help. But instead the City just gets in the way with antiquated zoning, low density coverage ratios, long complex approval processes, height restrictions and caving to the NIMBYs. The oft-cited shortage of family friendly low rise options could be addressed by allowing for laneway housing, sub-dividing houses into units, subdividing lots into multiples or allowing more coverage on each lot.

  5. jeff316 says:

    The problem is that no-one has defined the problem.

    Is the problem that
    – housing is too expensive for middle-income Canadians that live in major metro areas?
    – ever increasing mortgage sizes risk creating economic stability?
    – non-resident owners are not making maximizing use of their housing stock?
    – we are missing out on revenue generation opportunities associated with property ownership?

    All three of these problems are unique and require different responses. Bruk avoids identifying the problem, and largely suggests a bunch of revenue-raising tools (bar the crazy property standards requirements, which someone writing for Canada’s most respected newspaper should understand are not within federal jurisdiction, and the silly idea that we’re going to get eleven jurisdictions to come together and agree on a set of federal regulations)

    1. Kyle says:

      100% bang on!

      Before anyone comes up with ideas on how to cool, or points the finger of blame at who is causing the “problem”, it would be really great if someone could actually give valid reasons for why rising house prices in Toronto are a problem at all.

      1. Ralph Cramdown says:

        The rising prices aren’t the problem. It’s the sudden stop at the top, and the grinding descent with many people stuck owing more than they own, unemployment in a previously larger-than-normal housing sector, and bankers scared to lend.

        What model of the economy do you have that it’s normal for people to dedicate more and more of their lifetime earnings to housing, and less to everything else? Are people getting twice as much “utility” out of the house that goes for $1mm today but cost half that ten years ago? A $100,000 car is still a really nice ride, and a $40 bottle of wine bought at the government store is still quite drinkable, but a $1mm house sure ain’t what it used to be.Why have we collectively decided to reallocate our spending like this?

        1. Kyle says:

          Sorry Ralph i asked for “valid reasons”, not conjecture and rhetoric.

          NOTE: there’s a difference between managing risks and cooling prices. The “sudden stop”, which you have been waiting over a decade for, is far from a foregone conclusion. Creating policies that affect every Canadian, in the current market and all future markets, based on the predictions of those who have a long, peerless track record of calling real estate dead wrong, is IMO really bad policy. If on the other hand you’re trying to talk about prudently managing risk and mitigating potential impacts of falling prices, then that is exactly what the Government has been doing by tinkering with mortgages.

          As for your second paragraph, your ability to find myopic reference points, is only exceeded by your willingness to make/accept completely unfounded and unsubstantiated assumptions.

          1. jeff316 says:

            I think the questions in his second paragraph are valid and need to be asked and answered to the best of our ability, comparisons to consumer goods aside. They’re not unaswerable, but are qualitative.

          2. Ralph Cramdown says:

            Nice dodge.

          3. Kyle says:

            “What model of the economy do you have that it’s normal for people to dedicate more and more of their lifetime earnings to housing, and less to everything else?” – New York, London, Hong Kong…And basically every other large global city on the plant where the population is expanding. Let’s turn this around since you decided to use 10 years ago as your frame of reference to look at utility – how many large global cities have house prices equivalent to Toronto prices from 2006?

            “Are people getting twice as much “utility” out of the house that goes for $1mm today but cost half that ten years ago?” – If houses were disposable diapers,then your argument might make sense. People value houses on a multitude of things besides “utility”. What’s one’s commuting time, proximity to work, proximity to amenities, quality of life, ability to send their kids to the school that they want, sense of community, pride, security of housing and long term capital gains worth?

          4. ROTFL says:

            Toronto is NOT a large global city. Not by population, not by economic output (GDP), not by cultural influence and not because of a unique location as an entrepôt (as are Singapore and Hong Kong, e.g.). Repeatedly comparing Toronto to top tier global cities doesn’t make it so. We’re about as globally important as Houston or Atlanta, with maybe a bit more import when commodity prices are high and we become a major center in the mining finance world — which hasn’t been lately.

            I used 10 years as my frame of reference as that’s how long ago the NatBank/Teranet index says prices were 1/2 what they are now. No secret reasons. I put “utility” in quotes because I was referrring to the economist’s concept of utility, which encompasses all the factors you mentioned. https://en.wikipedia.org/wiki/Utility

          5. Kyle says:

            Ralph your bum must be really sore from the nonsense you pull out of it all day long. And seriously don’t you ever get sick of being wrong all the time? Kind of like when you pulled out that nugget about how Toronto and Vancouver weren’t Global Financial centres like Shanghai and Paris (which both rank below Toronto and Vancouver respectively): https://en.wikipedia.org/wiki/Global_Financial_Centres_Index

            Toronto is #10 in the ranking of most economically powerful cities in the World. Hmmm where’s Houston or Atlanta?
            http://www.citylab.com/work/2015/03/sorry-london-new-york-is-the-worlds-most-economically-powerful-city/386315/

            Here’s a listing for the top 25 Global Cities (cause after all that’s what we’re talking about), Toronto is right up there at #13 in the world. Houston and Atlanta?
            https://www.atkearney.com/research-studies/global-cities-index/2015

          6. Ralph Cramdown says:

            So when you talk about Toronto real estate prices, you compare to New York, London and HK, but the ranking lists you cite put us around the level of Boston, Chicago, Vienna, Stockholm, Brussels and Moscow. Good company, but not top shelf. And that second list comes from the Martin Prosperity Institute at the U of T. “Toronto awards itself a tie for 10th place” is a quintessentially Canadian headline, don’t you think?

            Don’t get me wrong; I think Toronto is a great city. It just isn’t in the same class as the cities that real estate bulls cite for comparison, and it probably never will be.

          7. Kyle says:

            1. I am not a real estate bull. If anything my annual predictions have tended to underestimate price appreciation

            2. I never said that Toronto compares to New York, London and HK. I was providing examples of economies where it is normal for people to dedicate more and more of their lifetime earnings to housing. And my exact words were, “New York, London, Hong Kong…And basically every other large global city on the plant”. Clearly this quite elegantly answers your original rhetoric, otherwise you’d be arguing the model, instead of pedantics like whether 10th or 13th spot is “Global”.

            3. Typical of a bitter bear to find a cop-out excuse to dismiss evidence that’s contrary to his delusions. Do you also question lists published New York-based institutions that place NY as #1? There are over 4000 cities worldwide, and Toronto is consistently ranked in the top 20 (i.e. top 0.5%) on dozens and dozens of lists published by well respected non-Torontonian institutions, like The Economist, Forbes, Mercer, Globalization and World Rankings Research Institute, Z/Yen Group, A.T. Kearney,….

            4. Plot those cities on a graph with $USD equivalent / sq ft on the x-axis and ranking on the y-axis, and you will see two things: 1. There is an irrefutable high positive correlation between ranking and house prices 2. Toronto prices are ACTUALLY UNDERVALUED

          8. jeff316 says:

            I’m not sure whether Toronto is a “global city” or not, but if it is not that means we can rule out the foreign ownership conundrum. 🙂

          9. Ralph Cramdown says:

            Bubbles, you are CONSTANTLY comparing Toronto to New York, London and Hong Kong in the comments section here. e.g.
            “But much better examples would be real estate prices in any large major world class city, like London, New York, Tokyo, Hong Kong, Sydney, Singapore…and Toronto.” — http://www.torontorealtyblog.com/archives/11865
            “Look at other large cities, is 10% of the apartments in New York, London, Hong Kong comprised of 1000+ sq ft 3 bedroom units?” — http://www.torontorealtyblog.com/archives/11976
            And really, you’re not a bull because prices went up faster than you thought? Don’t quit your day job (if commenting here isn’t it); you’re no Louis CK.

          10. Kyle says:

            LOL Ralph, you are still confused. All those times i mentioned New York, London and Hong Kong. I am NOT saying Toronto is the equivalent of those cities. Same as i did above, I am grouping Toronto in with those and all other large Global cities…cause as has already been firmly established – Toronto is one. And deep down even a hard core delusionalist like you can’t deny high prices are justified in large Global cities…and that obviously scares the shit out of you, cause it lays waste to all of your Mickey Mouse arguments. Frankly it’s utterly hilarious to watch how skeeved delusionalists like you get at the mere mention of Toronto and New York in the same breath and their desperate need to either dismiss such evidence, or draw some arbitrary cut off point on lists somewhere above Toronto. Just to give you more stuff to be freaked out about, you know who have been Toronto’s biggest admirers of late? The New York Times and The Guardian

            http://www.nytimes.com/interactive/2016/01/07/travel/places-to-visit.html?_r=1
            http://www.nytimes.com/interactive/2016/01/15/style/canada-justin-trudeau-cool.html?_r=1
            https://www.theguardian.com/cities/2016/jul/04/new-toronto-most-fascinatingly-boring-city-guardian-canada-week

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