Tag Archives: economy

CMHC urges lenders to stop offering so many high-risk mortgages

Canadian house prices have held up during COVID-19, but the Canadian Mortgage and Housing Corporation warns that this can’t continue forever. (Ron Antonelli/Bloomberg)

The head of Canada’s national housing agency is asking banks and mortgage companies to stop offering higher-risk mortgages to over-leveraged first-time buyers, because they represent a threat to the economy.

In a letter to officials in the federal government and representatives of Canada’s banking and credit union industry, Evan Siddall, the CEO of the Canada Mortgage and Housing Corporation, asked lenders to be more strict about how much money they are willing to lend to fund home purchases, and more diligent about who they are lending to.

The letter was first reported on by financial news channel BNNBloomberg before Siddall released the letter publicly on social media.

“I am asking you to continue to support CMHC’s mortgage insurance activity in preserving a healthy mortgage sector in Canada,” Siddall wrote to the banks, credit unions and other mortgage lenders that make up his customer base.

While the CMHC does not directly loan out money to buy homes, it has a massive influence on Canada’s housing market because it insures a big chunk of the loans that lenders give out.

By law, borrowers with down payments of less than 20 per cent must purchase mortgage insurance to cover potential losses if they default on their loans. Premiums that borrowers must pay for that insurance can add thousands of dollars to the cost of the loan.

CMHC recently raised its standards 

Earlier this summer, the CMHC announced it would raise its standards for giving out such insurance by raising the minimum credit scores it will accept, putting a cap on the gross debt ratio for an approved borrower, and banning the use of borrowed money to come up with the down payment.

The goal was to make it harder to get an insured loan, in the hopes that borrowers already stretched thin would not be able to get one and thus not be able to get in even further over their heads by buying a house they may not be able to afford. But things didn’t quite work out that way.

Evan Siddall is CEO of Canada’s national housing agency, and he warned members of the mortgage industry in a letter this week that he thinks there are too many risky loans out there. (Galit Rodan/Bloomberg )

CMHC is the dominant mortgage insurer, but they do compete with private companies Genworth and Canada Guaranty for business. It’s impossible to downplay CMHC’s outsized impact on the market, however — as of the end of 2019, the crown corporation was on the hook for $429 billion worth of Canadian real estate, by insuring the mortgages on it.

The insurers often move in unison, so in the past any change at CMHC was quickly matched by the other two. But that didn’t happen this time, which means the CMHC’s moves had little impact beyond moving borrowers from CMHC to a competitor. Anyone who was locked out by the CMHC’s higher standards simply got insurance elsewhere where the standards were lower.

In his letter, Siddall pleaded with lenders to work with CMHC to make sure lending standards don’t become even more lax.

“There is no doubt that we have willingly chosen to forego some profitable business that our competitors would find appealing,” Siddall said.

“While we would prefer that our competitors followed our lead for the good of our economy, they nevertheless remain free to offer insurance to those for whom we would not.”

By not tightening lending standards, Siddall warned that the entire economy could be put at risk.

The Switzerland-based Bank of International Settlements, an industry group for central banks around the world, warns that as a rule of thumb, when households have debt loads above 80 per cent of their gross income, it’s bad for the economy.

Canada’s ratio on that front has blown past 100 per cent and is approaching 115 per cent, Siddall warns. 

“Too much debt not only increases risk, it therefore slows economic growth.”

CMHC expects house prices to fall

COVID-19 has walloped every facet of the Canadian economy, but broadly speaking, house prices have yet to fall in any meaningful way. Compared to last year, average prices were flat in March and April, before ticking higher, in May and into June.https://datawrapper.dwcdn.net/6GnwF/1/

But that is unlikely to continue forever, Siddall warns.

He suggests a big reason that prices are staying high is because massive government spending programs like CERB and CEWS have allowed people to keep their heads above water for now.

But those are set to expire in the coming months, as will the hundreds of thousands of mortgage interest deferrals that banks have doled out. 

Once those programs end, bankruptcies and defaults may follow, and that is when prices may decline as new buyers are unable or unwilling to pay ever-higher prices, and sellers behind on their mortgages could become desperate to sell.

“The economic cost of COVID-19 has been postponed by effective government intervention,” he said. “It has not been avoided.”

House prices could fall by about 18 per cent and the impact of COVID-19 will be felt into 2022, the CMHC said recently.

Siddall said that under the current rules, there are loopholes that could allow people to buy houses with negative equity.

Although rare, mortgages for 95 per cent of the home’s value are allowed, and that loan would come with a four per cent capitalized insurance fee. Even a tiny fall in the housing market for someone with that loan would be onerous to withstand, as the homeowner would owe far more on their home than it is worth in reality.

‘Dark economic underbelly’

“In the midst of an economic calamity,” Siddall said, “we risk exposing too many people to foreclosure. These are individual tragedies that also create conditions for exacerbating feedback loops and house price crashes.”

Without naming names, Siddall accuses some in the industry of handing out too many risky loans while ignoring the long-term cost of doing so.

“Please put our country’s long-term outlook ahead of short-term profitablility,” he said.

“There is a dark economic underbelly to this business that I want to expose.

Source: CBCNews.ca – Pete Evans Senior Writer Aug 12, 2020 2:19 PM

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Trudeau announces new emergency programme for workers who lost work from COVID-19

Trudeau announces new emergency programme for workers who lost work from COVID-19 

Prime Minister Justin Trudeau has announced the federal government is launching the Canada Emergency Response Benefit, a new programme that will provide $2,000 a month for four months to individuals who lost their work as a result of the COVID-19 pandemic.

Speaking outside of his residence where he is self-quarantining with his family, Trudeau acknowledged the dilemma facing Canadians trying to process mounting bills without a steady income, noting that “far too many Canadians are having these tough conversations about their finances and their future.”

With nearly 1 million people applying for employment insurance last week, Trudeau stated the new programme is in the process of being set up.

“An application portal will launch as quickly as possible and people should start receiving money as soon as 10 days of applying,” he said.

The programme will replace a pair of initiatives, the Emergency Care Benefit and the Emergency Support Benefit, that were announced last week. Trudeau said the decision to combine the two earlier programmes into a new endeavour was done “in order to streamline the process.”

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4 Factors That Will Determine Canada’s Real Estate Market In 2016

REAL ESTATE GRAPH

Other than the weather, 2016 has not been particularly kind to Canada.

The Loonie is the lowest it has been in 15 years, a barrel of gas is trading for less than $30 and Canada’s National Men’s Junior hockey team didn’t even reach the semi-finals! Compare these factors against the rising U.S. greenback and you get one gloomy economic forecast. However, there is one section of our economy that seems to be unaffected, as the real estate market is showing little signs of slowing down on a national level.

Despite the troubling forecast, don’t expect any price breaks in Canada’s real estate market for 2016. TREB is predicting an increase in the average price of a home to rise by nearly 10 per cent, a number skewed by big markets where demand outweighs supply like the GTA.

The Canadian housing market is coming off a truly remarkable run, and RentSeeker is here to help you prepare for the road ahead. These will be some of the biggest factors affecting the housing market in 2016 and must be considered by anyone who is currently in or thinking about entering it.

Oil Prices

Oil prices have hit lows we haven’t seen in decades as the price of a barrel plummeted more than 60 per cent since June of 2014. Currently trading for less than $29 a barrel, the ‘bottom of the barrel’ seems more like an endless pit.

Certain oil producing countries and companies have flooded the market with a surplus of supply, driving down the cost of crude. As a result it’s been a downhill slide for the Canadian energy sector that plays a huge role in the national economy.

The oil, gas and mining sector accounts for more than a quarter of the national GDPand many workers have been laid off as Canadian oil production has come screeching to a halt.

When the energy sector is in good shape, so is real estate, particularly in Western Canada. However, the market in British Columbia is soaring as house prices in Vancouver continue to skyrocket, although Alberta is definitely taking a hit after experiencing numerous years of growth.

The Low Loonie

The Canadian dollar is worth less than 70 cents U.S., a rate we haven’t seen since 2003 — a time before Netflix and when most people didn’t have Internet access on their cell phone.

Furthermore, our currency has lost more value against the U.S. than other major currency, including the Pound or Yen, leading some economists to state that we’reflirting with recession.

Depending on where you live in Canada, these overwhelming numbers will have a drastic affect on the housing market in your area. At this point, many economists believe the worst is still yet to come, and that may be tough to believe for those living in Western Canada.

Many companies in Canada are suffering from increased expenses and people are loosing jobs. The Toronto Star has shut down its printing plant, and Goodwill shut down 16 stores in Ontario — two examples of companies that have experienced hard times and are cutting jobs.

When Canadians lose jobs, the real estate market suffers. We will see how the low Loonie affects the unemployment rate and which provinces will be hit the hardest.

Borrowing Costs

Mortgage rates can’t get much lower! The low, low Loonie and price of oil have been major contributors to muted borrowing costs for Canadians. Mortgage rates are extremely affordable, making it easier than ever for many new home-buyers (despite the modest increase in a minimum down payment for properties over $500,000), especially in smaller markets outside the Big Three (Vancouver, Toronto, Montreal).

This CBC article states that “many economists predict Bank of Canada governor Stephen Poloz will be forced to lower the interest rate yet again because low crude prices are cutting into Canada’s economic growth.”

As long as borrowing money is cheap, real estate prices won’t be. For those who are priced out of the housing market, while rents have also risen across the country, it is the only option for many. Apartment finders like RentSeeker.ca and classifieds like Craigslist and Kijiji are a good place to search for those looking for an apartment to rent across the country.

Foreign Investment

Foreign investment in the Canadian real estate market has always been a double-edged sword. For those who own property, increased foreign investment has been welcomed as they have seen their own property value increase. However, for the majority of Canadians who rent, foreign investment means increased real estate prices that were already unaffordable.

Many people who have lived in Vancouver for years are being driven out of the city due to over inflated real estate costs, and locals are demanding government intervention. A prime example of the double-edged sword, Dirk Meissner of theCanadian Press pointed out that the B.C. Finance Ministry could lose $1 billion in real estate sales and nearly 4,000 construction jobs if the government intervenes to minimize foreign investment activity.

For better or for worse, foreign investment is a major factor, and a low Canadian dollar makes foreign investment very attractive. Don’t expect a decrease for in-demand cities like Vancouver, despite a gloomy economic outlook.

Our new prime minister inherited a difficult situation on the economic and political front, and the Liberal Party has a tough road ahead. The Liberals have traditionally not been a “finance first” organization, and the current economic situation is one of the worse we have experienced in decades.

Rona Ambrose has clearly stated her concerns that a “very new and untested” Liberal Government isn’t prepared to deal with the future, but let’s hope she’s wrong.

Despite the rocky start to 2016, our real estate market isn’t showing signs of slowing down. We’ll just have to wait and see how things turn out.

Source: HuffingtonPost.ca Posted: 01/22/2016 2:25 pm EST

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