Banks Call for Higher Down Payments

Rising down payments FBThe CEOs of National Bank & Scotiabank, Louis Vachon and Brian Porter, made headlines this past week by suggesting that Ottawa raise the minimum down payment. Reportedly, they want people to put down at least 10% on all homes under $1 million.

Today, Canadians must lay out at least 5% on purchases up to $500,000, plus 10% on any amounts between $500,000.01 and $999,999.99. It’s a reasonable policy that lessens risk on higher-priced homes in torrid housing markets.

When hearing bank bigwigs opine on down payments, one has to wonder how long it’s been since they were first-time homebuyers. Today, the number one reason young Canadians don’t buy homes sooner is the current equity requirements. Over two-thirds of CMHC insured buyers, for example, can only scrounge up 5.00% to 9.99% down payments.

Were regulators to heed these bankers, it would force untold thousands of young Canadians to rent (or keep their parents company) significantly longer. That’s despite their qualifications as borrowers and despite any social/economic ramifications. And for what? To protect banks’ earnings? To curb Toronto / Vancouver housing while setting back buyers in the other two-thirds of the country where values are stable or falling?

How about these banks mitigate their own risk? They can do that by continuing to approve people who can clearly service their debt, irrespective of equity. It’s a crazy concept, but it might just work.

Take someone who earns a stable income, has demonstrated their ability and willingness to maintain pristine credit and is not over-extended with debt. That person has earned the right to own. The fact that they’ve saved only 5%, and not 10%, does not make them a high-risk borrower. Any systemic risk they do pose is mitigated with default insurance, which they pay for.

A flat 10% down payment is not the answer. It doesn’t achieve the correct goal. The goal of further regulation should be to keep higher-risk borrowers out of the market, not to keep all borrowers without an arbitrarily set down payment out of the market.

The Department of Finance should really be targeting borrowers who finance higher-value properties (non-starter homes) with smaller-than-average down payments, higher-than-average debt ratios and lower-than-average credit scores. One way to do that is by lowering the maximum allowable debt ratios on those borrowers—i.e., on borrowers exhibiting “layered risk.” If another economic shock does come along, these are the folks most likely to stop making their mortgage payments.

It would be so much more productive if the Porters and Vachons of the world elaborated on their logic when making public statements about mortgage rules. One would think (hope) they have internal numbers—like stress test results, arrears trends, etc.—to back up their arguments. As it stands, today’s publicly available data does not support Canada-wide down payment hikes for well-qualified young buyers.

When policy-makers see their subjects (bankers) asking for tighter equity requirements, they listen. In this case, hopefully they don’t listen too closely.

  1. This potential first-time homebuyer wholeheartedly agrees with legislating higher downpayments. It would be a small but positive step in unraveling the disaster that British Columbia has become. The current first-time buyer scenario is not worth defending.

    Increasingly nobody but the BC government and a subset of industry insiders are happy with the status quo. Even putative beneficiaries — current homeowners, banks, and yesterday the mayor of Vancouver — are screaming for meaningful intervention.

    It’s annoying to read yet another industry insider ostensibly pleading my case while advocating government inactivity.

    1. Read again Alec. Nothing here advocates government inactivity. Given there are other regions to consider besides B.C., the point is simply that intervention should be properly targeted.

      1. You’re consistently critical of government intervention here, Rob.

        Is it tautological to suggest that first-timers who can’t save $50k are clamouring for $500k mortgages only in areas where housing is already out of control? I’d say that’s pretty accurate policy targeting.

        1. Hi Alec, By “here,” you must mean CMT since this particular story is not critical of government intervention in general. In fact, further tightening may well be warranted, primarily in the GTA/GVA.

          The concern is directed at the proposed method of intervention: raising minimum down payments on everyone buying a home less than $500k. According to data from MPC and BMO, the average borrower’s mortgage (including first-timers) is less than $300,000. In the majority of regions it’s materially less. These are not the folks making the housing market tipsy.

          As mentioned, not only does a 10% equity rule on below-average-priced homes do little to address surging valuations in Toronto/Hamilton and Vancouver/Victoria, it spawns a host of socio-economic risks nationwide.

  2. Like locking the stable after the horse has bolted.Have they thought this all the way through? What does a higher down payment do to decrease the liquidity & value of their security?

    What’s old is new again. Set up a true first time buyers program, with lower down payments , with regionally set maximum propert purchase prices,

    I have proposed in the past to aid flrst time buyer’s down payment by allowing parents & immediate family members only, to lend money from their RRSPs secured by first &second mortgages, maximum terms of 5-7 years, 0% interest & no payments). Lets families assist their own “children” in getting a leg up on property ladder,secures the debt against divorce or bankruptcy,No payments so GDS/TDS not impacted.Lenders lose interest & opportunity cost on lost interest, Call it an investment in the future.

    Also suggest that default insurers not be allowed to insure & FRFIs not be allowed to lend in condo corporations where more than 50% of the units are tenanted. Given the long term nature of real estate & mortgages you will see accelerated physical deterioration & larger than average increases in condo fees & steeper declines in the values of units in these buildings.You can’t make this retroactive, but you an start tomorrow.

    Slowing down this this runaway freight train of real estate prices, in selective areas of the country, without damage to the rest of the overall economy will require the dexterity of a surgeon,the thought processes of a chess master & the determination of a warrior…. Know anyone qualified for the job?

    1. Interesting talking points David. Thanks for writing. Regional price/equity controls tend to have nagging long-term side effects, like supply disruptions, price distortions in bordering areas, transit and traffic implications, etc. To date, policymakers have been hesitant to entertain them. Although, we did recently see one regulator (OSFI) start basing bank capital requirements on regional prices, so anything is possible.

  3. Thank you for pointing that out Robert. It seems banks are out of reality and try to punish first time buyers for their risks. As an industry insider and an avid advocate for the first-time buyers (because my friends and I belong to this exact category), I absolutely agree that further increasing down payment requirements will push first time buyers out of the real estate market completely. Regulations, politicians and those who argue in favour should try to recognize that most first-time buyers are young families with small kids who are already struggling with high costs of raising families. And not many of them have extended families who can help with such a big purchase. Don’t forget that young families are paying rents equal and sometimes even higher than would be mortgage payments in Toronto and Vancouver. They are also most of the time having only one full-time earner or paying exorbitant costs of the day and after-school cares, on top of repaying student debts, contributing to the RESPs, and trying to raise healthy and intelligent future citizens. How on earth they are able to save at least $70,000 or more for a house in Toronto. The argument let them go to the smaller cities is not reasonable and I will not even start discussing or replying to comments about it.
    I’m not economist by profession but have enough education in economics to know that the market is always driven by the supply and demand. The previous increase in down payment (February 2016), decrease in amortizations periods, etc. have not had any impacts exactly because the causes for the increasing prices are different. What’s wrong with the economists employed by banks if they don’t see that. Or it’s another case when, we do what is popular but not what’s right and economically sound.
    Great article Robert and thanks for speaking out on behalf of all young families.

    1. Appreciate the perspectives Olesya. It certainly isn’t first-timers who are jacking up the national average home price. As it gets harder and harder to save, the last thing they need (to the extent they’re well qualified) is someone moving the goalposts on them further.

  4. Perhaps raising the minimum down payment to 10% on 2nd home purchases would help leave some inventory for 1st time buyers. Going after 1st time buyers is confusing, it makes more sense to reign in 2nd time buyers which is a very active portion of the market from what I see.

  5. Rob raised many good points about the lack of logic behind simply increasing minimum down payment from 5% to 10% across the board. I want to underline the single worst aspect of such a change: unfairness.

    Picture yourself as a young couple who have been saving relentlessly for that 5% down payment for that starter home in Moncton or Medicine Hat or Kamloops or Sarnia or Quebec City and you are within a few hundred bucks of your down payment goal the government announces a doubling of your minimum in an “attempt” (because there is ZERO certainty the change will have the desired effect) to solve a problem that only exists in two urban areas in Canada.

    You would be so angry and rightfully so because the change was ridiculously unfair to you and your family.

    So let’s give the bank CEOs credit that they are worried about a housing bubble in those 2 urban areas, they SHOULD be worried about a future problem in those two places but for Heaven’s sake there have to a dozen better ways to try to correct the housing bubble in those two markets than to simply beat up hard working people from coast to coast who are saving up to buy their first home. If you wanted to take the MOST unfair approach that would be one to pick.

    1. Thanks Ron. If history is a guide the Feds would give borrowers about two months to save the extra 5% down payment (before the new rule took effect). That’s clearly not enough time.

      Then again, buyers could always put their 5% on black and hope for a good spin.

  6. Bring in a regional mortgage cap that sets a maximum dollar amount on the size of mortgage CMCH insure. GTA and GVA can be targeted this way.

    Abolish assignment clauses or contract flipping. Target speculation.

    Tax foreign inflows. Better this way than beinging in ‘general revenue’ taxes to local residents later. Exploit the cash cow.

  7. “How about these banks mitigate their own risk?” That to me is really the crux of the issue here. If they’re not comfortable lending, then don’t. Big business needs to stop trying to “game” the system to remove risk at the expense of the consumer.

  8. Rob,

    Another good article. When a bank CEO makes an irresponsible remark like this, with nothing(that we know of) backing the statement up it hurts the majority of responsible buyers out there.

    If either gentleman is serious about the need for 10% DP, then they do not need legislation or federal interference in the market, they can adopt this approach within their own policies and underwriting guidelines.

    If the concern is protecting their own financial institutions, let them take things into their own hands.

    1. Bingo. They can simply adjust their own requirements and decline anything with a higher LTV than 90%. If they don’t want to fund those mortgages, fine, someone else will be happy to take it off their plate.

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