Facts From the 2012 Canadian Housing Observer

Canadian Housing Observer 2012“…The increasing role of mortgage brokers (has) enhanced the ability of borrowers to negotiate better mortgage rates or other terms,” says CMHC’s latest Canadian Housing Observer.

That’s not at all surprising. But what some people don’t realize is that CMHC supports brokers (indirectly) by supporting small lenders and competition. It does that through its Canada Mortgage Bond (CMB) program.

CMBs provide liquidity to smaller lenders, some of which depend on it heavily. In turn, brokers are active users of those lenders.

CMHC says, “the number of participants other than the big 6 banks in 5-year fixed rate CMB transactions almost quadrupled between 2006 and mid-2012.” Smaller lenders now make up 82% of CMB participants and 61% of issuance volume.

In short, CMHC has helped keep mortgage rates lower than they’d otherwise be. Other things equal, that would be a boon for mortgage borrowers. The question is, how much have lower rates boosted home prices and offset the rate savings?

According to this Bank of Canada research, it may be less than some think. Declining real interest rates have accounted for only 13% of the past decade’s home price growth, the BoC contends. Meanwhile, estimated 5-year fixed discount mortgage rates fell almost 40% in that same time period.

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Below are other factoids from this year’s Housing Observer:

3.7%:  The ratio of mortgage interest paid to household disposable income, as of 2011. This is well below the 4.7% average since 1990, says CMHC.

64%: The ratio of Canada’s housing stock that is 30+ years old.

177,019: The average annual growth in the number of Canadian households (from 2006-2011).

75%: The amount of mortgages held by chartered banks (That’s as of January 2012 and includes securitized mortgages. Credit Unions are second and hold 12%.)

72% of CMB buyers are Canadian. The next biggest share (14.5%) comes from the U.S.

41.5% of CMB buyers are insurance companies and pension funds while 36.7% are chartered banks and “quasi banks.”

And here are a few charts of note…

Avg-Mortgage-Payment-Ratio

CMHC says the ratio of mortgage principal and interest to disposable income was 34.3% at the beginning of 2012. That’s well below 2007 and 1990, but it’s also well above the 26.8% from one decade prior (in 2001).

Funding-Costs

This chart above shows how cost-effective CMBs have been as a mortgage funding source. That’s even more important when the relative cost of funding via deposits (GICs) rises significantly, as it did last year.

Apart from CMHC’s securitization programs, there is also private securitization. Unfortunately, there has been no market for, and no issuance of, private residential mortgage-backed securities (RMBS) in recent years (2010 or 2011). Prior to the financial crisis, certain non-bank lenders relied heavily on RMBS.

On a more positive note, CMHC says “renewed investor interest” has helped asset-backed commercial paper (ABCP) make somewhat of a comeback in the mortgage market. ABCP provided funding for $10.1 billion of mortgage assets in 2011, after some tough years following the credit meltdown.


Rob McLister, CMT

  1. Well done article Rob. Regarding the effect of rates on home prices, home prices move for reasons other than just rates. I don’t think the CMHC effect on rates has raised home values all that much and frankly I don’t care. As a homeowner with equity and a mortgage, my stance is that lower is better when it comes to rates. The housing market and home prices will eventually balance out irrespective of rates.

  2. Lenders that can’t take deposits are at the mercy of banks and the federal government for funding, not an enviable position. Who knows what Flaherty will do next to dismantle the mortgage market. For all anyone knows, CMB issuances could drop by half in a few years.

  3. Well, that’s sort of a silly thing to say, “CMB issuances could drop by half in a few years.” Of course they could. Interest rates could also go up. They could also go down. All the homes on the Canadian market could, for some reason, simultaneously combust in the next few years. It’s unlikely, but as you said, for all any of us know. You can actually say that with anything related to the housing market because, as Rob has pointed out himself on several occasions, he doesn’t have a crystal ball. I don’t know what your exact point is, but I’m pretty sure Flaherty won’t do anything else to the mortgage market. He’s not going to revoke the new rules because they were necessary at the time and have done their job. He’s also probably not going to introduce any new ones, as he likely knows the crippling effect they would have. But like you said, none of us know. Maybe he will.

  4. Lender allocations have been slashed in the CMB market. Given the de-risking going on in the mortgage world, it is absolutely not silly to prepare for less CMB liquidity. If you don’t know the point of all this, you must not understand how lenders are funded.
    By the way, being “pretty sure” that Flaherty won’t make more changes is as safe as being pretty sure you won’t impregnate someone while not wearing a condom.

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