CMHC is the government body that insures mortgages. To put it in the simplest of terms, when CMHC insures a mortgage, it means the bank essentially does not have any risk when it issues the loan. Of course there’s some risk carried by the bank but the Government is saying “Ok, we like this loan, we’ll guarantee it”. So if the borrower doesn’t pay it, the bank will not be out of the funds, as CMHC will pay it.
In the worst case scenario.
Of which we see it extremely extremely rarely.
And not even a pandemic is creating this scenario, yet.
WHY am I telling you this?
CMHC is led by Evan Siddall. Evan has been a rather mercurial CEO and President of CMHC. Well, he’s also leaving this year, which, frankly, did not bring a tear to any mortgage broker’s eyes. In fact – I was extremely happy to read that news back in January in the good ol’ days. 2020 started off on a tear, lending was great, blah blah, all things up!
And then, today, the other shoe may have just dropped. In a speech to the Finance Committee, Evan may have left his greatest mark on CMHC’s policy moving forward by essentially saying “5% down is going to be completely eliminated”.
(In case you don’t feel like reading the whole speech, here are the juicy parts):
We feel we need to avoid exposing young people (and through CMHC, Canadian taxpayers) to the amplified losses that result from falling house prices. Unless we act, a first time home buyer purchasing a $300,000 home with a 5 per cent down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10 per cent. (Our calculations include the mortgage insurance premium and the costs of selling the home if forced to do so because of unemployment or any other reason.) In comparison, a 10 per cent down payment offers more of a cushion against possible losses.
People believe that owning a home is essential for retirement savings. Indeed, over the past 20 years, the average Canadian homeowner has had a tax-free gain of $340,000 in the value of their home. That sounds great, until we add in the fact that $300,000 of that gain has been created by increased borrowing. These house prices and debt levels are increasingly out of reach for young people. Home ownership actually tends to be lower in countries with higher incomes.
Basically what I’m reading into this is CMHC is strongly
considering getting rid of the 5% down payment as being allowed, and forcing borrowers to come up with 10% down, minimum, to get into the market. What kind of impact will this have on our market? Depends on who you believe. An overwhelming majority of borrowers have at least 20% down payment.
You can thank the bank of mom and dad and a huge run up in house prices to help people get to these levels. The problem is that the trickle-down effect will be felt across the board. If a move-up buyer can’t reach up and grab the next wrung in the ladder because the first-time buyer isn’t able to get in and/or isn’t able to pay as much as the move-up buyer needs, because the market has softened (one, because of Covid-19 and two, because they are now out of the market), then this will have a long-standing effect on everyone involved.
While I have always said our real estate market is very very resilient, I just don’t know how much more of this it can take.
What would I do right now if I was a BUYER? I would tell ALL of my first-time buyers with minimal down payment to get hustling and moving. While I admire CMHC’s point that we need to protect us from ourselves, and that it is possible we’ll see a decline in house prices (very possible), I also feel that this move will push a LOT of people into the rental market, further away and not closer to the dream of home ownership.
Which is why CMHC was created in the first place! To make home ownership a reality. As soon as I know more news about this potential change, you’ll be the first to know. Until then, I wanted you to know this is being discussed as it just happened today and I’m sure tomorrow will see a lot of attention on it in the business news.
Ask me any questions, anytime. Thanks for reading.
PS- Did you see the part about “tax-free”? That’s probably the next shoe to drop – eventually capital gains on primary properties will be taxable.PPS- Do you like how CMHC uses the most extreme of examples of buying at the total, total peak, and then selling? Nice try…
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