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Andy CharlesI had a chat with Canada Guaranty CEO Andy Charles today. Like most industry leaders, he’s concerned with maintaining stability in Canada’s high-value housing markets.

As a mortgage default insurer, Charles knows a thing or two about risk mitigation. So we asked him for his take on raising minimum down payments in order to create a risk buffer and slow real estate valuations. He made three points of note:

  1. Regulatory changes over the last several years have made the first-time homebuyer a modest player in the overall housing market:“The changes made to the high-ratio mortgages (first-time homebuyers) the past several years (reduced amortizations, debt servicing restrictions, etc.) have served to significantly reduce the size of the first-time homebuyer segment. It now represents just 30% of Canada’s housing market with the significant majority of home financing utilizing conventional mortgages.”
  2. Increasing the minimum down payment would materially hurt Canada’s smaller urban housing markets:“Raising the minimum down payment to 10% would have the unintended consequence of negatively impacting housing markets in almost all other areas of the country. Home prices are soft and either flat or moderately decreasing in almost every city in Canada other than Toronto/Hamilton and Vancouver/Victoria. Housing markets and first-time homebuyers in Montreal, Halifax, Calgary, Edmonton, Winnipeg, Regina, and Saskatoon, not to mention other smaller cities, would very likely experience negative economic impacts due to increasing the minimum down payment at a national level.”
  3. GTA/GVA price increases are not being driven by the first-time homebuyer:“The large increases in single-family home prices in the GTA/GVA markets are not being driven by the first-time homebuyer with a 5% down payment. The 5% down payment segment of borrowers are generally not purchasing single-family dwellings in the GTA and GVA markets, as a very significant portion of these homes are priced above the $1 million value restriction for high-ratio purchases. Raising the minimum down payment in these markets would have very little, if any, impact on the trajectory of GVA/GTA single-family house prices in the foreseeable future. The average mortgage size of the first-time homebuyer is approximately $300,000.”

Charles added in closing:

“While I share the concerns regarding these specific markets, we take the view that raising the minimum down payment will penalize the first-time homebuyer, risk dampening already soft housing markets in most of the country, and will do little to help achieve the desired public policy of moderating the price growth in the GTA and GVA markets.”

Charles is one of an increasing number of industry leaders publicly weighing in on mortgage policy as of late.

 

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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.

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Back in December when the finance department hiked minimum down payments, it said the change would “dampen somewhat the pace of housing activity over the next year.”

If “somewhat” means “barely noticeable,” then the regulation has achieved its goal, at least in Toronto and Vancouver.

Effective February 15, the minimum down payment rose — up to 2.5 percentage points — on homes between $500,000 and $1 million. Since then, there’s been no perceptible slowdown in Toronto and Vancouver home sales. Those two cities, which are among the fastest-appreciating markets in Canada, were the primary targets of the Department of Finance’s new policy.

 

Vancouver Avg home price

In the first full month following the rule change, the Canadian Real Estate Association (CREA) says that sales of single-family homes over $500,000 were the highest ever in March, in both Toronto and Vancouver.

“While it is still premature to reach a verdict on the efficacy of this measure to cool Canada’s two hottest markets, the early evidence suggests that it had little effect to date,” RBC economist Robert Hague said in a research note. 

A breakdown of home sales by property value, courtesy of the Toronto Real Estate Board and the Real Estate Board of Greater Vancouver, further illustrates the runaway sales of higher-priced homes.

 

March data reveals that homes valued between $500,000 and $1 million rose 28% in Toronto and 27% in Vancouver compared to last year. There’s no telling what sales would have been without higher down payments, but take a $750,000 home, for example. An additional 1.67% down payment isn’t exactly an insurmountable obstacle for most buying at that price point.

First-time buyers will take the brunt of these changes. “The affordability of homes in these mar­kets has taken a further hit…,” points out National Bank Financial in a report this week. Following the rule implementation, “…The time required to accumulate a minimum down payment for the representative home increased in Q1 by 11 months in Toronto and by 34 months in Vancouver.” 

Moreover, while regulators have not materially slowed higher-risk housing markets, larger down payments have nonetheless had two positive outcomes. For one, new buyers in the $500,000 to $1 million range now have more to lose if they don’t pay their mortgage. In addition, as Hague notes “…We believe that the measure has enhanced the degree of prudence in the mortgage adjudication process.” And there’s nothing wrong with that.


Sidebar: Sales of homes valued at more than $1 million also exploded in March, up more than 60% in Toronto and Vancouver.


By Steve Huebl & Rob McLister

 

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Gender inequality FBOne in four British Columbia parents have bankrolled part of their child’s home purchase, and they’ve done it through down payment assistance.

In fact, down payment gifts and loans are the second-most common way that parents financially support their adult children. That’s according to a recent Vancity poll. (“Resolving debts” for their kids is the #1 way parents help out with money.)

But parental support has an interesting bias. Depending on your gender, you can expect significantly more down payment support from the folks.

Specifically, males were twice as likely as females to have received down payment money from mom and dad. The survey found that 39% of males aged 18-34 acknowledged receiving down payment money from their parents—compared to just 19% of females.

“We cannot explain the reason for this difference in numbers,” said Vancity spokesperson Lorraine Wilson. “…It requires further research on why there is a difference in inheritance expectations and realities for females.”

We’re no social scientists, so we can only speculate here:

  • Is there a cultural gender bias? In some parts of the world, men commonly receive double the inheritance of women. It’s baked into their religion.
  • Is it like the wage gap? When it comes to pay, men make more than women on average. But that gender gap doesn’t carry over to inheritances, at least not in North America (according to this research).
  • Do men more often “take care” of their damsels by coughing up most or all of the down payment?
  • Do men buy homes earlier than women?
  • Are women better savers than men?

In truth, we can only guess at why women don’t (or can’t) tap their parental ATM as often for down payment funds. It might make a good university thesis for those so inclined.


Poll Methodology from Vancity: “Insights West conducted [this] online survey for Vancity from January 22 to January 27, 2016. The survey polled 403 adult British Columbians who are “older than 65 and parents of at least one child” and 401 adult British Columbians who are “aged 18-34 and have at least one parent aged 65 and over.”

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Morneau

Finance Minister, Bill Morneau

If you’re trying to scratch together a down payment, or you sell mortgages for a living, today’s news could have been much, much worse.

The new down payment rules Finance Minister Bill Morneau announced this morning were as benign a policy change as one could hope for. This refers, of course, to the new minimum down payment requirement, which takes effect on February 15, 2016.

For properties between $500,000 and $1 million, folks getting an insured mortgage will now need to put more down—up to an additional 2.5% of the purchase price. In other words, 5% down will be required on the first $500,000, and 10% down will be required on the next $500,000.

For a $750,000 property, that means you’d have to cough up a 33% bigger down payment (compared to today), or another $12,500. The new rule doesn’t affect properties over $1 million because they don’t qualify for high-ratio mortgage insurance anyway.

As we reported last week, it seemed clear that some sort of down payment changes were on the way. But the speculation was that Ottawa would impose a flat 7-10% down payment for properties between $500,000 and $1 million. The actual rule announced today will affect far fewer borrowers than that (Benjamin Tal estimates about 4% of buyers overall). Many folks buying in that price range will find a way to scrape up an extra $5,000 or $25,000—from mom and dad, from borrowing their down payment, from selling other assets, etc.

Of course, buyers without other resources may have to save for another one to three years to buy a higher-priced home. But the deferral of these buyers will barely put a dent in home prices, at least in cities where high-value properties and multiple offers are the norm. (Properties over $500,000 in smaller metros will be more impacted.)

The changes I’d be more concerned about, as a consumer, are the higher securitization fees and larger capital requirements for lenders. These policies were announced in tandem with the down payment tweak.

Most lenders will absolutely pass down some or all of these costs to consumers. In fact, with the rate increases of late, some speculate they already have been.

I’ve been researching all day on what that means for mortgage pricing. The potential impact looks to be in the range of 3-8 basis points for the securitization fee change (depending on the lender), and another few basis points for OSFI’s additional capital requirements. Let’s call it a total 5-10 basis-point hike in mortgage rates over time.

CMHC says “the changes in guarantee fees are not expected to have a material impact on the level of mortgage rates, which remain at historically low levels.” And it’s right. But 5-10 basis points means a well-qualified ultra-low-risk borrower will cough up another $700 to $1,400 in interest over five years on a 5-year $300,000 mortgage. And who wants to pay that?

Then again, there’s a case to be made for building the war chests of CMHC and lenders, in the highly unlikely event that home prices crash land. So at least borrowers can take solace that their hard-earned interest payments are going to a “good” cause.

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Implementation details:

  • Qualified borrowers who get approved before February 15, 2016, can still buy with only 5% down. But lenders will likely set their application submission deadlines 1-2 weeks earlier.
  • People will still pay the same default insurance premiums, based on their overall loan-to-value (e.g., 3.60% of principal for a 5% to 9.99% down payment).
  • Check out these FAQs for more details.

On securitization:

  • CMHC’s intent was to raise CMB costs equally on small and large lenders alike. The increased cost amounts to roughly 40 bps for all lenders, says a source very familiar with the change.
  • The new guarantee fees reduce the attractiveness of securitizing via Canada Mortgage Bonds, relative to NHA MBS (where fees are also going up for lenders issuing over $7.5 billion worth of NHA MBS).
  • The MBS guarantee limit was raised from $80 billion to $105 billion for 2016, but it won’t create any more MBS funding or risk. The extra is just to support new requirements of the CMB program.
  • The government’s stated purpose of these fee hikes was to “encourage the development of private market funding alternatives by narrowing the funding cost difference between government-sponsored and private market funding sources.” Good luck with that. Insured mortgages, to which these fees apply, can’t be securitized outside of CMHC-sponsored channels. And no “private” CMHC-sponsored securitization markets exist (that we know of anyway).

Other effects:

  • First-time buyers were mostly spared by these new down payment regs. Their average purchase price is $293,000, well under the $500,000 threshold. 
  • Moreover, less than 1 in 10 first timers are buying $500,000+ properties to begin with.
  • Calgary could get hit the hardest (just what they need), because they have a much larger share of high-ratio mortgages, says Tal.
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Higher downpaymentsBy the end of January, the Department of Finance may recommend raising the minimum down payment to 10%. That’s what I’m hearing from a high-level lender source connected with the DoF, who declined to be identified.

Policy-makers are reportedly considering a graduated scale based on either the home value or mortgage amount—something like this:

  • $0 to $500,000 requires at least 5% down
  • $501,000 to $700,000 requires at least 7% down
  • Over $700,000 requires 10% down

These numbers are purely speculative, but such a methodology would do two things:

  1. Insulate first-time buyers (who typically have mortgages in the high $200k or low $300k range), and
  2. Shield smaller markets that haven’t seen the stratospheric home prices of Toronto and Vancouver.

Research from Mortgage Professionals Canada suggests up to 115,000 recent buyers might not be able to afford a 10% down payment, forcing them to defer purchases for potentially years. Studies like that probably factored into the DoF considering a graduated scale. Kudos to DoF policy-makers, by the way, if they do in fact avoid an across-the-board 10% down payment requirement and spare young buyers and weaker housing markets.

The DoF will presumably make its recommendation to Minister of Finance Bill Morneau. Morneau would then need to weigh the political and economic implications of this move. Our bet is that he’d side with senior policy-makers who are concerned about Ottawa’s exposure to the housing market, and put this into regulation sometime next year.

We’re currently awaiting comment from the Finance Department, but there’s likely not much they can say ahead of a formal public announcement. Sources say that if they do implement higher down payment rules, it would not require a public comment period and could be done relatively quickly.

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The door is closing on one of the last remaining forms of 100% financing. On June 30, insurers are banning cash-back down payment mortgages.

Only a handful of lenders still market these products, and they’re all provincially regulated credit unions. OSFI has effectively barred cash-back down payment mortgages at the federal level (e.g., at banks).

Despite questions about the risk of these products, they’ve been an almost insignificant concern for the mortgage market. The fact is, their uptake has been extremely low. Most people find a way to scrape up a 5% down payment and avoid paying posted rates for 100% financing. Moreover, the only borrowers who qualify for these no-down mortgages are those with pristine credit, solid employment/income prospects and low debt ratios (i.e., a strong borrower, albeit one with little equity).

With the demise of this product we may very well see an uptick in unsecured line of credit (ULOC) usage. Insurers will still permit the minimum 5% down payment to be borrowed from ULOCs, as long as that credit line payment is factored into the applicant’s total debt service (TDS) ratio. In fact, the mortgage lender itself can provide that ULOC, and a few may even start actively promoting it.

Homeowners who borrow their 5% down payments must pay an additional 0.25 percentage point default insurance premium. That’s on top of the recently increased 3.60% standard premium for 95% loan-to-value financing.

 

The Down Payment Hurdle

canadian dollar houseNine out of ten Canadians would rather own than rent, according to a new Genworth Canada study.¹ But the down payment often stands in their way.

A recent Vancity poll found that 60% of first-time buyers in B.C., for example, find down payment requirements to be a barrier to home ownership.

Nationally, 53% of homebuyers are worried they might miss their dream home because they’re short on the down payment.


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First-Time Down Payments

canadian dollar houseA wide majority of first-time buyers-to-be plan to put down less than 20%, according to new data from RBC/Ipsos.

Here’s the breakdown of their expected down payments:

  • 10% or less (62% of respondents)
  • 11-20% (26% of respondents)
  • More than 20% (12% of respondents)

Over half of newbie homeowners will likely pay the maximum default insurance premium to buy their home.* That maximum ranges from $2,750-$2,900 per $100,000 of purchase price (i.e., 2.75%-2.90%), depending on the source of down payment.


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Alternative Down Payment Sources

Down-PaymentThis week’s Globe column looks at ways people scrape together down payments when they don’t have enough non-registered savings of their own.

It’s still perplexing that regulators let homebuyers borrow their 5% down payment from high interest sources, yet the government bans lower-interest cash-back down payment mortgages and 100% financing.

That’s not to say that borrowing a down payment is advisable (it isn’t in most cases). It’s more a statement that there is regulatory inconsistency here, which is peculiar in a hyper risk-sensitive lending environment.

More via: Canadians can still buy a house without saving their pennies