Submission to the Standing Committee on Finance

The following submission is in response to the Standing Committee on Finance’s comprehensive study of issues surrounding the Canadian residential real estate market; the impact of the housing market on the Canadian Financial System and challenges surrounding access to residential
home ownership.
February 1, 2017
Gary Mauris
President
Dominion Lending Centres
2215 Coquitlam Avenue
Port Coquitlam, BC V3B 1J6

Executive Summary:
Thank you for the opportunity to make a submission on the impact of the housing market on the Canadian Financial
System and challenges surrounding access to residential home ownership. Dominion Lending Centres is Canada’s largest brokerage firm with 5,000 community-minded mortgage professionals. Together with our affiliated companies,
The Mortgage Centre and Mortgage Architects, we facilitate approximately 38% of all mortgages in Canada, more than any of the 5 biggest banks.
Each year, our mortgage professionals work alongside lenders to provide hard-working individuals and families the opportunity to realize a dream – long-term financial security in a home. In many parts of the country, such as Toronto and Vancouver, our clients have prudently saved for many years to earn the down payment and right to secure a mortgage with a lending institution or bank. In other areas of Canada, such as the Prairies and Quebec, seniors amid the rapidly aging baby-boomers and young families faced with an unstable economic future, are relying on the equity of their homes for wealth security.
Although we appreciate and share the government’s concern regarding the debt levels of Canadians, brokers across Canada were surprised by the extensiveness and immediacy of mortgage rule changes announced October 3rd 2016, which had significant impacts on thousands of our clients and your constituents. What was within reach for many, is no longer attainable, which has a direct and immediate impact on the economy at the local, regional and national level.
The housing market represents roughly 13% of Canada’s GDP, so the impact is quite significant. Housing has been one of the major contributors to economic growth in recent years.
However, we respectfully disagree with the scope and timing of the policy changes and we welcome and are grateful for the opportunity to provide feedback on behalf of our clients and brokers.
Outlined below are our perspectives and recommendations on the key changes to mortgage rules in Canada and how to make housing more affordable for Canadians.
Expanding Mortgage Rate Stress Tests to all Insured Mortgages
All new mortgages now need to qualify at the greater of either the Bank of Canada posted rate (4.64%) or the contract rate. The net effect on first-time home buyers is that their purchasing power has been reduced by upwards of 20%, which has significant impacts on many marginal buyers. Not only does the stress test reduce purchasing power, it makes housing less, rather than more affordable.

Here are two real-life examples of clients who have been directly impacted:
A young gentleman from Lethbridge, Alberta was, under the previous rules, pre-approved for a $250,000 mortgage but has had his pre-approval reduced to $200,000 because of the stress test benchmark rate of 4.64%. He is single, employed, debt-free (after paying off a truck loan) and is easily able to afford payments on a $250,000 mortgage.
His goal was to find a home with a basement suite or enough rooms to rent to friends. However, he is now in a position where he can only purchase a small home or a condo. His projected monthly expenses will increase as he will no longer have the option to rent parts of his home or he will be paying monthly condo/strata fees on a condo.
In London, Ontario a young working woman has saved $40,000 over five years to purchase a single-family dwelling and with the new rules is only able to afford a condo. However, finding a condo with low enough strata fees to meet her monthly budget is proving impossible so she has no option now but to continue renting. As a result, she is unable to build equity, and as housing prices rise she is falling further behind.
These are just two examples of thousands of cases we are seeing firsthand across the country. Individuals and families who have had their purchasing power reduced by 20% are now looking at purchasing condos with monthly fees or smaller homes in less desirable locations – farther away from where they work, resulting in increased commuting costs. For those who must now postpone home purchases to save more, they are falling further behind as house prices in many regions (and prices of many goods and services across our economy), rise and become further out of reach.
The unintended consequence of the stress test is it has made housing less affordable, not more affordable. This is in contrast to provincial government policies that are trying to make housing more affordable – such as in British Columbia which has launched a down payment program to help new home buyers enter the market.
With that in mind, and even with a hot housing market, we believe there is an extremely low chance of the kind of defaults witnessed in the United States in 2008 given Canada’s current default rate of circa 0.28%.
Dominion Lending Centres agrees with government’s core objective to reduce the risk of a major rise in defaults should rates increase and we also agree that a stress test is the most prudent policy to achieve this. However, using the Bank of Canada posted rate as a benchmark is excessive in our view, as an overnight 2 percentage point increase in mortgage rates is unlikely given the low inflation rate and moderate growth in Canada.
We recommend a more modest benchmark rate that sits halfway between the Bank of Canada posted rate and the current contract mortgage rate. This would be sufficient to protect Canadians from over-extending in the inevitability of a rate increase.
The unintended consequence of the stress test is it has made housing less affordable, not
more affordable.
Submission to the Standing Committee on Finance
New Restrictions On Low-Ratio Mortgage Insurance
Eligibility Requirements
Portfolio (bulk) insurance on low loan-to-value mortgages (with at least 20% down payments), used predominantly by monoline lenders, must now meet the same criteria as high-ratio mortgages (less than 20% down).
Additionally, mortgages with amortizations of more than 25 years, refinancings, mortgages on homes valued at more than $1 million, and property that is not owner-occupied can no longer qualify for portfolio insurance.
While traditional lenders, (such as the top 5 banks), have multiple revenue streams to finance mortgage loans, giving them the ability to effectively insure their own loans, the same cannot be said for non-traditional or monoline lenders.
Monoline lenders access funds through the mortgage-backed securities market, which can only be accessed with insured mortgages. They, therefore, rely on portfolio insurance to finance their lending activity. As a result of the new requirements, investors are less inclined to fund monolines who must now charge higher rates, as investors expect a risk premium, which must be passed along to the consumer.
Genworth Canada estimated in October of last year that one-third of their monoline portfolio of new insurance written would no longer be eligible for mortgage insurance.
This puts traditional lenders at a competitive advantage as monoline rates go up. Mortgage credit availability is reduced to the extent that some monolines will be forced to close or merge with other institutions, also reducing competition in the marketplace.
Again, just like the new stress test rules, the net impact on the consumer is negative, making housing less affordable. As well, because the new rules prohibit insurance on non-owner occupied properties, there is an added strain on the already tight rental market as those who invest in rental properties face higher rates and fewer borrowing options.
Additionally, with the limitations on refinancing (some lenders are either not offering it anymore while others are adding a rate premium) consumers are facing higher debt-servicing costs.
Although not the most prudent fiscal strategy, it is not uncommon for consumers to consolidate debt and pay off higher interest consumer debt by consolidating it into a lower interest mortgage. With this option taken away, consumers are facing higher overall interest debt loads.
We would therefore recommend that government reverse these changes or at least allow refinanced mortgages and mortgages on homes valued at up to $1.5 million (given in some major markets homes over $1 million are commonplace and not a luxury) to be portfolio insured. We would also be open to seeing the threshold reduced to a 75% loan-to-value ratio, rather than removing eligibility for these products entirely.
Submission to the Standing Committee on Finance
1/3 of monoline (non big bank) mortgages would no longer be eligible for mortgage insurance under these new rules.
Mortgage Insurance Rules and Lender Risk Sharing
The Federal Government backs 100% of the mortgage insurance obligations of CMHC, a unique approach compared to other nations. A lender risk-sharing program would raise the risk associated with funding mortgage and increase the capital lenders require. Once again, while banks are sufficiently capitalized to retain loans on their books, smaller lenders are not and thus would need to increase mortgage lending rates to offset additional risk, thus increasing costs to consumers. Additionally, as monoline lenders who are unable to raise sufficient capital close their doors or merge with others to remain in the market, there will be less competition among lenders, thus increasing rates and costs for borrowers.
Even the banks are likely to pass off the cost of risk sharing to the consumer, increasing fees and mortgage rates, further reducing housing affordability.
From a consumer perspective, the net effect again would be that housing become less affordable, not more affordable. In our view, this is unnecessary given Canada’s low default rate of circa 0.28% and the fact that CMHC has more than enough in reserves to cover outstanding mortgages in the unlikely event of a major rise in defaults.
Conclusion
Dominion Lending Centres recognizes and appreciates the government’s legitimate concern regarding the debt load of Canadians and concern related to housing affordability. When setting and analyzing housing and mortgage policy, it is important to remember that 70% of households in Canada own their dwelling. Many Canadians are relying on the equity in their home for a retirement cushion.
The real culprit to lack of affordability is supply. To make housing more affordable without adding supply means housing prices must fall, which has a net-negative effect on the financial security of Canadians. At the same time, measures to make mortgages more difficult to obtain result in reduced housing affordability.
By making housing less affordable and reducing demand (impacting home values), we are unintentionally widening the wealth gap for middle-class Canadians. We would strongly urge government to focus its affordability efforts with a robust strategy that involves city planners, developers and municipal and provincial governments looking at innovative ways to expediently increase the housing stock, both for home ownership and for rental.
Submission to the Standing Committee on Finance
As it pertains to mortgage rules and recommendations, and in addition to the
recommendations above, we echo those put forward by Mortgage Professionals Canada:
•
Suspend all measures yet to be implemented to analyze whether the already-implemented changes will have
the intended policy impact.
•
Adjust the November 30, 2016 change to allow for refinances to be included in portfolio insurance. If an 80% loan-to-value ratio is objectionable, reduce the threshold to 75% rather than removing eligibility to these products entirely. This adjustment would alleviate some of the competitive disadvantage pressure the cumulative effect of these changes place on the non-bank lenders.
•
Reconsider the increased capital reserve requirements for lenders implemented on January 1, 2017 especially on insured mortgages.
•
A review be conducted into the long-term impact of regional-based pricing on the Canadian economy as a whole, and the potential additional harmful effects on already strained regional economies.
•
Refrain, at this time, from implementing the proposed risk-sharing model.
Once again, thank you for this opportunity and we look forward to many more opportunities to contribute to mortgage and financial policies moving forward.
Gary Mauris,
President, Dominion Lending Centres

The Canadian government has unveiled its housing strategy plans, following months of consultation with Canadians and industry stakeholders.

“Affordable housing can connect individuals with the facilities and services they need to build secure, productive and meaningful lives for themselves.
Living close to jobs, public transportation and childcare enables people to participate fully in society and the economy,” Jean-Yves Duclos, minister of families, children and social development, said in the report, entitled What we heard: Shaping Canada’s national housing strategy. “A National Housing Strategy will align the efforts and resources of all players – governments, stakeholders in the private and non-profit sectors and others – toward improving housing outcomes for all Canadians.”

The 66 page report, which was prepared by the Conference Board of Canada, was released Tuesday, which marks National Housing Day in Canada.
The strategy focuses on housing affordability for all Canadians. It was formulated following consultation with over 7,000 Canadians who expressed a number of ideas on how the Canadian government can address housing needs for citizens across the country.

As a result of that consultation, a number of themes emerged.

The housing plan has a ways to go before actual policy is implemented, however.

“The hard work continues. Needless to say, broad consultations indulge peoples’ expectations, as they should,” the report said. “However, policy makers must balance these against fiscal constraints. Our objective will be to develop an NHS that employs finite government funds to maximum effect, yielding the best outcomes.”

The major themes reported in the study can be viewed below:

Helping those in greatest need. It is clear that Canadians are united in wanting better housing outcomes – not just for themselves, but for individuals and families with the most severe housing needs, including low-income Canadians, the homeless and victims fleeing violence.

Helping Indigenous peoples achieve better housing outcomes for themselves. Indigenous peoples told us that a separate, but parallel strategy is needed to address the unique housing challenges facing Métis, Inuit and First Nations peoples living on and off reserve, in cities and remote areas, and in the North and bring housing need levels on par with on-Indigenous peoples.

Eliminating homelessness. A fundamental goal of a National Housing Strategy should be to eliminate homelessness in Canada, and short of that, make it rare, brief and non-recurring. The needs of homeless Canadians, who fall at the extreme end of the housing spectrum, ought to be prioritized.

Making housing more affordable. Canadians said housing they can afford and that meets their needs was the most important housing outcome. The lack of affordable, suitable and adequate housing is especially a concern for low-income households and other vulnerable Canadians across the country. 

Adopting a housing systems perspective. Canadians told us they expect a National Housing Strategy to better coordinate the various housing initiatives already in motion across the country and to tackle housing needs across the entire continuum.

Pressures from global volatility and slow growth in the wake of the Brexit haven’t deterred the Bank of Canada from its current monetary policy; the central bank has opted to maintain the overnight lending rate at 0.5%. The Bank Rate is correspondingly 0.75%, and the Deposit Rate is .25%.

While it was widely expected that the BoC would hold status quo on rates, there was some speculation that a rate cut was in order due to Alberta’s massive forest fires and the resulting impact on oil production. Flames forced many oil sands projects to shutter, cutting production by an estimated 40% – a gap of 1 – 2 million barrels per day – and costing GDP and estimated $985 million.

“In Canada, the quarterly pattern of growth has been uneven. Real GDP grew by 2.4% in the first quarter but is estimated to have contracted by 1% in the second quarter, pulled down by volatile trade flows, uneven consumer spending, and the Alberta wildfires,” states the BoC’s release. “A pick-up to 3 ½% is expected in the third quarter as oil production resumes and rebuilding begins in Fort McMurray.”
While the BoC’s projections remain close to those presented in April’s Monetary Policy Report, it is reporting a revised forecast due to weaker business investment outlook, and a lower profile for exports as a result of weaker US investment spending.

Real GDP is expected to grow by 1.3% in 2016, 2.2% in 2017, and 2.1% in 2018, as the Liberals make good on their promise to amp up infrastructure spending and investment.

“The Bank projects above-potential growth from the second half of 2016, lifted by rising US demand and supported by accommodative monetary and financial conditions,” it states. “Federal infrastructure spending and other fiscal measures announced in the March budget will also contribute to growth.” 

The BoC adds that consumer spending will also get a boost from the Canada Child Benefit.

While the market volatility following the Brexit has led other nations’ central banks to loosen monetary policy, Poloz has stated that Canada’s lenders are resilient enough to withstand any fall out. However, it emphasizes hot housing markets are a main contributor to downside risks facing the economy.

“Overall, the risks to the profile for inflation are roughly balanced, although the implications of the Brexit vote are highly uncertain and difficult to forecast. At the same time, financial vulnerabilities are elevated and rising, particularly in the greater Vancouver and Toronto areas. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at ½%.”

Home prices across Canada are set to jump this year as interest rates are kept near record lows by economic uncertainty from the U.K. referendum to leave the European Union, according to brokerage Royal LePage.

The average house price will rise 12.4 percent from 2015 to C$563,000 ($434,000), the highest year-over-year forecast from a real estate firm since at least 2000, Royal LePage reported Wednesday. With turmoil from June’s Brexit decision filtering into Canada’s economy, homebuyers can expect  mortgage rates to stay low and steady demand to continue to push prices higher, said Phil Soper, the brokerage’s chief executive officer.

“Economic and social disruptions have rocked the world once again, introducing new risks and making it very likely that the Bank of Canada will leave interest rates as is for now,” Soper said in the report.
Price gains will be led by Toronto and Vancouver, the country’s hottest housing markets. The average price of a Vancouver property — including condominiums, two-story homes and bungalows — will surge 27 percent from last year to C$1.2 million, according to Royal LePage. Prices in Toronto are forecast to climb 14.9 percent to C$718,000. The only major city set to cool is Edmonton, sliding 1 percent to C$376,700.

The Central Bank held its target for the overnight rate at ½% Wednesday, citing increasing “household vulnerabilities.”

“Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher,” the Bank said in its announcement. “Meanwhile, the risks to the Bank’s inflation projection remain roughly balanced.

“Therefore, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate, and the target for the overnight rate remains at 1/2 per cent.”
The Central Bank argues oil price shock is still being felt, but that economic growth in Q1 has aligned with its expectations.

However, the economy will take a hit in Q2 due to the wildfires in Fort McMurray.

“The second quarter will be much weaker than predicted because of the devastating Alberta wildfires,” The Bank said. “The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter.”

The economy is expected to rebound in the third quarter due to oil production resuming.

“Inflation is roughly in line with the Bank’s expectations. Total CPI inflation has risen recently, largely due to movements in gasoline prices, but remains slightly below the 2 per cent target,” The Bank said. “Measures of core inflation remain close to 2 per cent, reflecting the offsetting influences of past exchange rate depreciation and excess capacity.”

The Bank of Canada will maintain its target for the overnight rate at 1/2%.

“Inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods,” the Bank of Canada said in a release. “As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017. Measures of core inflation should remain close to 2 per cent.”

The bank did acknowledge that commodities and oil prices continue to take a hit and negatively impact the economy. It suspects the economy stalled in Q4 2015. It also expects growth to be delayed.

“The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016,” the BoC said. “The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.”

On a bright now, however, employment and household spending remains strong.
​
“The Bank projects Canada’s economy will grow by about 1 1/2 per cent in 2016 and 2 1/2 per cent in 2017. The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain,” the bank said. “The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.”

New down payment rules will go into effective February 15, 2016.

“The Government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions,” Finance Minister Bill Morneau said in a release. “They also rebalance government support for the housing sector to promote long-term stability and balanced economic growth.”

The minimum down payment for new insured mortgages will increase from 5% to 10% for the portion of the house price above $500,000, the finance ministry wrote.

Minimum down payment for properties up to $500,000 will remain at 5%.

The changes are meant to reduce taxpayer exposure while supporting long-term stability of the housing market, according to the ministry.

“This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term,” Morneau said. “It also protects all homeowners, including many middle class Canadians whose greatest investment is in their homes.”