Rumours of Lunacy

Will DunningBy Will Dunning, Economist
Special to CMT

Once again, there is speculation that the federal government will tighten mortgage insurance criteria — prompted by this article in the Financial Post.

Let’s begin by saying that, in most of Canada, housing markets have been far from hot. Toronto and Vancouver are seeing rapid price growth, but that is mainly due to provincial and municipal policies that restrict the supply of building lots for new homes — in those two cases, lack of supply is the issue, not mortgage lending. Elsewhere, home sales and price growth have been moderate during the past two or three years. At the moment, we are seeing improved sales, but only because mortgage interest rates have fallen to yet another all-time low. That wave of activity will fade.

2 kinds of resale markets

The Financial Post article suggests measures being considered are:

  • Increasing the minimum down payment from 5%
  • Shortening the maximum amortization period from 25 years (possibly to 20 years)
  • Limiting mortgage insurance for high-priced homes

The article states that, while changes are under consideration, no decisions have been made.

Higher Down Payments

CAAMP has extensive experience in reviewing and commenting on changes to mortgage lending criteria. CAAMP’s spring 2015 survey focused on Canadians who have recently purchased homes (during 2013 up to the time of the survey in May 2015). In the report titled “A Profile of Home-Buying in Canada,” we asked:Mortgage rule rightening

“If the minimum down payment requirement was 10% instead of 5%, would you still have been able to afford to purchase your current residence?”

Six percent of the buyers (or 35,000 per year out of 620,000 homebuyers) indicated that they definitely would not have been able to make the purchase. A further 13% (80,000 buyers per year) probably would not have been able to buy their home.

The absence of 35,000 (or more) buyers from the market would have had profound impacts on sales activity, leading to downward price pressure, which would, in turn, have had significant impacts on the Canadian economy (due to the important role of house prices in determining consumer confidence and as a driver of job creation).

Moreover, the loss of at least 25,000 first-time buyers would have made it more difficult for move-up buyers to sell their existing homes. That would have prevented many of them from making their own purchases. This effect would have amplified the negative impacts in the housing market and the broader economy.

On the other hand, 62% of all buyers (380,000) definitely would have been able to make the purchase, and a further 20% (125,000 buyers) probably would have been able to make the purchase.


Table 1
Impact on Ability to Purchase Current Home
if Minimum Down Payment was 10%

1st-Time Buyer 2nd-Time Buyer Subsequent Purchases All Buyers
Definitely Able 130,000 85,000 165,000 380,000
Probably Able 75,000 25,000 20,000 125,000
Probably Not Able 50,000 10,000 15,000 80,000
Definitely Not Able 25,000 5,000 5,000 35,000
Total 280,000 130,000 210,000 620,000
Source: Survey by Bond Brand Loyalty for CAAMP; analysis by the author.


This survey data clearly indicates that an increase in required down payments from the current 5% would have severe consequences for the housing market, to the extent that there would be negative consequences for the broader economy.

Reducing the Maximum Amortization

Now, about shortening the maximum amortization period to 20 years. During 2008 to 2012, four sets of policy changes to mortgage insurance reversed liberalizations that had been put in place in the early years of the federal Conservative government. Major items in these four sets of changes included:

  • Eliminating zero down payment lending
  • Shortening maximum amortization periods from 40 years to 25 years on high-ratio mortgages
  • Creating qualification rates to test borrowers’ ability to make payments at higher-than-actual rates (applicable to those with variable-rate mortgages and terms less than five years).

The first three sets of policy changes had negligible effects. While there were fluctuations in sales activity at the times, they can be related to movements of mortgage interest rates rather than to the policy changes.

But the fourth set of changes (which took effect in July 2012, and which shortened the maximum amortization period from 30 to 25 years) caused sales to fall sharply. There were no other obvious factors that could have caused that plunge.

CAAMP’s fall 2012 report used a very large database (59,000 actual mortgages) to estimate the impacts of the major policy changes. Those simulations found that the earlier changes would have only minor impacts on the buyers’ abilities to afford their actual mortgages. But, the reduction of the maximum amortization to 25 years from 30 years would have a large negative effect.

This research also indicated that the negative effects would be long-lasting, as it would take long periods for affected potential buyers to save the much larger down payments that they would need.

As CAAMP has reported in multiple issues of its semi-annual reports, the negative effects of the 2012 policy change have been diminished, but the policy continues to cause resale market activity to be lower than it would otherwise be.

As CAAMP’s Chief Economist, I also concluded that the reduced housing activity in Canada would negatively affect job creation. And those negative effects would occur slowly. During the two years up to the spring of 2015, job creation is likely 150,000 less than without said changes. I recall that this suggestion generated quite a lively discussion on CMT.

The impact on jobs is difficult to test, since we only know what occurred, not what should have occurred. But available data suggests that something really did happen. This chart below compares the employment-to-population ratios in Canada and the United States. After the recession ended, the employment rates followed similar trends in both countries, being roughly flat or perhaps rising incrementally. That similarity has ended during the past two years, as the employment rate has risen in the U.S. (by about one-half of a percentage point), but has fallen in Canada (by about one-half of a percentage point).

Can-US Employment-to-population ratio

If the employment rate in Canada had stayed flat (instead of falling) the level of employment this June would have been 139,000 higher. Alternatively, if the Canadian employment rate had increased similarly to the U.S. rate, June 2015 employment would have been 286,000 higher than the reported number. The fall in the Canadian employment rate (and the corresponding slowdown of job creation) has multiple causes. But the timing of the jobs slowdown (starting in the summer of 2013) coincides with what was expected from the policy change that occurred a year earlier.

To conclude, a further shortening from the current 25-year maximum could be expected to worsen an already negative effect on Canada’s economy.

Limiting Insurance on Higher-priced Homes

With respect to possible restrictions for high-priced housing, it’s hard to see much benefit for the mortgage insurers.

CAAMP’s spring 2015 survey data indicates that only about one percent of home purchases in Canada are priced at $1 million or more, and a further two percent of purchases are priced between $800,000 and $999,999. In total for Canada there are about 20,000 to 25,000 home sales per year priced over $800,000. Only about 3,000 per year would have insured mortgages. If we use $1 million as a threshold for “high-priced,” the effect is even less: about 1,000 dwellings per year might have insured mortgages.

Restricting mortgage eligibility for high-priced homes would have negligible ramifications on risk for the mortgage insurers, and on total housing activity in Canada. But it would have materially negative consequences within that very small subset of the market.

During the recovery from the recession, the two primary drivers of job creation have been the housing sector and investment in energy projects. Now that oil prices have plunged, energy investment is also contracting. This leaves the residential real estate sector as the most positive component of the Canadian economy. Any policies that are intended to weaken the housing sector would in turn create unnecessary risks for the entire Canadian economy.

About the Author

Will Dunning is an economist, and has specialized in the analysis and forecasting of housing markets since 1982. In addition to acting as the Chief Economist for CAAMP, he operates an economic analysis consulting firm, Will Dunning Inc. His website is:

  1. No doubt a difficult decision for CMHC and the Feds. To what extent can the policy bodies create rules for Toronto/Vancouver at the exclusion of the other markets?

  2. As usual Will a great analysis.

    I strongly agree with your first two recommendations, The Feds should not mess with the minimum down payment nor with the amortization . Both of these items impact first time buyers & a balanced real estate market always needs first-time buyers to “push” a market forward. As well messing with those two parameters could have a significant negative impact on the construction industry thereby increasing unemployment.

    I do question, & maybe you could elaborate on, the cap on default insurance based on price. You indicate that 3% of sales are on homes with values greater than $600k. I would suggest that $600k gets you an above average house in most Canadian housing markets other than Toronto & Vancouver.

    I remember when the first-time buyer/5% program came out in the early 1990’s & there were price caps on purchase prices that qualified for the program. A couple of years later the caps were removed. I questioned at the time the wisdom of removing the caps. Removing caps allowed builders to build larger (more profitable for the builder) homes instead of what is always needed, more affordable “Everyman” entry level homes. As long as first timers get a foothold in the real estate market, households will be formed. Households buy other goods & services thereby keeping the economy moving.

    Ultimately some of the first time buyers will convert to move-up buyers with sufficient equity that they will not require default insurance.

    From my perspective the Feds could do the least damage & the greatest good by putting regionally specific caps on purchase prices that qualify for 5% down purchases & leaving everything else alone.

  3. Although the government is in a tough spot resulting from market conditions beyond their control, my take on regulatory intervention is that it can only go so far before it starts damaging an entire industry that may take years to recover once negative sentiment takes hold….Canada’s recent economic challenges are likely to maintain a sustained low interest rate environment for some time to come, like it or not. Further intervention will only exacerbate problems on the economic front, and cause a negative trend for industries critical to the much needed growth that the government may ultimately wish it never started.

    Unless the CDN Fed is prepared to conduct an intense in-depth study with constructive feedback from all related industries in order to appropriately address the real concerning issues at hand (like the level of consumer debt), I suggest they leave well enough alone.

  4. I have yet to see one verifiable article, argument or study that indicates that anything other than the law of supply and demand is taking effect with respect to the real estate market in Canada.

    And yes, I’ve read them all, from the anecdotal to the downright racist. From the empty theories of perma-bears like Ben Rabidoux, to the mindless droning of Garth Turner. From conspiracy theorists wearing tin-foil hats to those tortured souls filled with hate and xenophobia.

    This whole notion of “fixing” the market, has all of the earmarks of a solution in desperate need of a problem.

  5. Thanks for the comments gentlemen. There’s been a growing chorus singing about regional mortgage rules. It’s an interesting debate because, apart from their pros and cons, it’s hard to envision how regional regulations could be equitably implemented. Defining regions by city lines is tough because communities on each side of the boundaries could be materially advantaged or disadvantaged.

    As for lowering the nationwide insured price cap from $1 million, that’s essentially akin to the Feds penalizing otherwise highly qualified borrowers who need to live in the GTA or GVA, solely because they don’t have 20% down.

    On that note, CMHC has long proclaimed that it supports housing choice for “all” Canadians. More and more, that seems to mean “some” Canadians. It’s apparently not good politics to defend the housing choices of folks earning $100,000+, but price caps effectively border on discriminatory. The reality is that well-qualified folks who buy higher-priced homes create no more risk to the system and create beneficial economic spin-off effects. Moreover, thanks to an increasingly progressive tax regime, their tax dollars back CMHC proportionately more than the average taxpayer.

    At least we all have the *comfort* of knowing that insured price limits make our homes more accessible to rich foreign buyers with 20-50% down. Thank goodness for that.

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