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When it comes to the total mortgages arranged in Canada each year (by all lenders), definitive data isn’t easy to find. So we have to rely on estimates.

CIBC economist Benjamin Tal is one of the best estimators out there. And his latest figures suggest the market is a lot bigger than some in our business may think. 

The estimates we typically cite for annual residential mortgage originations range from about $210 to $250 billion. But that doesn’t include renewals.

By Tal’s calculations, the total of all residential mortgages negotiated or renegotiated in 2016 was $405 billion. This figure is a much truer indication of what the theoretical potential market is for mortgage lenders.

This data includes purchases, refinances and renewals of owner-occupied and residential investment properties (including 1- to 4-unit and 5+ unit residential properties).

Tal writes that the total number is up 5.5% over 2015. Canada’s “typical” home price rose 13% in the same timeframe, according to Royal LePage dataBut with insurers already citing a 15-20% drop in business since the mortgage rule changes, 2017 volumes won’t be as rosy.

 

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Mortgage volumes in the broker channel surged in the third quarter, up 9.6% year-over-year. That’s according to data from D+H.

This data precedes the government’s transformative mortgage rule changes which kicked in on October 17 and November 30. 

The top 10 broker channel lenders accounted for 84.8% of broker volume, the most in seven quarters. That’s a trend that could strengthen in 2017 as the Department of Finance’s new rules injure small lenders.


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Survey FBThe value of a poll question depends heavily on how you ask it. Take this “finding” from Forum Research, as reported by the Toronto Star:

“Ottawa’s tougher rules for…mortgages are a good idea, according to 63% of Canadians.”

That’s an interesting conclusion given the question that Forum Research asked:

“The Liberal government has tightened mortgage-lending regulations, and cancelled the primary residence tax exemption for foreign real estate buyers. Do you approve or disapprove of this decision?”

As written, the question combines two distinct rule changes: the new insured mortgage rules and the banning of the primary residence tax exemption for foreign real estate buyers. Combining the two has likely impacted the responses because a majority of people (rightly or wrongly) strongly support curbing foreign buyers. Even if some folks were not necessarily supportive of “tightened mortgage-lending regulations,” the grouped-in foreigner question could lead many to say they “approve.”

What’s more, the surveyor does not explain how “tightened mortgage-lending regulations” will reduce affordability, a big pain point for young buyers. Nor does Forum Research explain how such restrictions might jeopardize an existing homeowner’s equity. Nor does it touch on the potential economic ramifications of the rules, or even the future potential benefits for housing stability.

“We generally do not provide ‘context’ for fear of biasing the question and for fearing that we are providing information to respondents that the general population does not have,” says Forum Research President Lorne Bozinoff. But that cuts both ways. Had more people understood all of these points, and had the questions been asked separately, the “approval” numbers (for the mortgage changes specifically) might have looked rather different.

Knowing Canadians’ true feelings on one of the most impactful mortgage rules of all time would have been valuable. It’s too bad these pollsters dropped the ball.

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Conference4 FBHere’s the second instalment of CMT’s coverage of the 17th Annual Scotiabank Financials Summit (see Part I). In it, Canada’s banking leaders expound on everything from mortgage risk to regulation to housing affordability.

Their most notable quotes are sorted by category below.

Key commentary appears in blue with our thoughts in italics.


On mortgage lending risk / impairment

David McKay, President and Chief Executive Officer of RBC

  • In response to a question about why RBC’s impairments are higher than its peers: “…we have got significant revenue coverage of the risk position we are taking. And while our cumulative losses are higher than maybe our peers are, we make on average $300 million more a quarter in the capital markets business than our peers, which is a billion and two over a year, and we have lost I think $150 million more…So yes, our higher loss rates is only $150 million more than our peers on average but we have made a billion more – that is pretty good coverage.”

Victor Dodig, President and Chief Executive Officer at CIBC

  • “…A shift has been happening from the insured to the uninsured at CIBC, partly driven by secular trends. I mean, CIBC is just not doing as much of it as it used to. We look at those mortgages and the larger ones, particularly on the West Coast, are manually adjudicated. We comb through them in quite a detailed fashion. We look at the client base that we are bringing in, not only in terms of the mortgage that they are taking out, but what other business are they bringing in. And some of the non-conforming mortgages, where you have larger homes being purchased, we see a correlation between deposits and investments come into Canada. The fact of the matter is people are resettling here and we are investing in our business and benefiting from that growth.”
    .
    (As Dodig suggests, the percentage of uninsured mortgages has been rising industry-wide. The problem is, uninsured liquidity hasn’t been rising in parallel. The government’s talked a big game in the past about fostering lender competition, and one might argue that it’s not a priority anymore given Canada’s housing imbalances. But those capital, insurance and securitization restrictions should have created a level playing field, and they haven’t. Funding costs have risen disproportionately for smaller lenders that drive consumer savings, and that’s been a major failing of post-crisis policy.)

 

Scotia on government regulations and mortgage growth:

Brian Porter, President and CEO of Scotiabank

  • “…In the past we have been very supportive of the changes that Ottawa has made to the Canadian housing market—generally post-crisis to today, whether it is down payments, whether it is adjusting amortizations, those type of things.”
  • “If you look at our mortgage growth this year, because we were concerned about the market being maybe a little heady in Vancouver, maybe a little heady in the GTA, if you look at our mortgage growth this year it has been 2.7%.” (i.e., below its peers).
  • “If you look at our mortgage book we have got the highest amount of insured [mortgages] at 59%. We have got the lowest LTV on the uninsured portfolio, and if you look at our tail risk of higher LTV mortgages it has been turning down over the last two years, and that is by design.”

 

From the panel discussion on housing affordability across Canada

Stuart Levings, President and CEO of Genworth Canada

  • “I think the obvious statement is that we’re seeing increasingly a trifurcated housing market with Vancouver/Toronto absolutely running away, with Calgary/Edmonton showing some weakness and the rest of Canada basically just plodding along very, very flat. The Vancouver/Toronto markets are obviously gaining a lot of attention, for a good reason. Affordability is at crisis levels in those cities. Obviously Vancouver has chosen to do something about it now more recently…It does appear to be having somewhat of the desired impact as far as slowing down some of that activity and softening some of the prices at a higher end in particular. Toronto may well become the Vancouver of Canada if nothing else is done here, and if some of that foreign capital comes to this city we all think very strong numbers could come out of Toronto.”
  • “For me, the biggest takeaway is: let’s pause and let some of the measures that are currently in place or recently implemented or about to be implemented in terms of new capital requirements from OSFI take effect, because there are a lot of indicators that…suggest that things are already slowing. I mean, eventually the levels of house price appreciation we’ve seen are not sustainable. Affordability becomes a constraint unless you’re an unlevered wealthy buyer, not buying with any debt. Outside of that, which is the majority of buying, there is some point where you cannot debt service anymore and people will also deem it as no longer a good investment…So I think there are already some really obvious breaks on the demand factors that need to fully play out and need to be fully…measured in terms of the effect in the market before additional intervention.”
    .
    (Some refreshing common sense there from an industry leader. A slew of rules have been thrown at the mortgage market in recent years. The potential exists that material government mortgage tightening from this point on—until we reach the next housing trough or plateau—could dangerously reinforce the down cycle. With 40% of Canada’s growth linked to housing as of late, pro-cyclical policy—assuming we’re entering a contractionary phase of the cycle—boosts odds of a hard landing and its accompanying economic consequences. As long as median home prices in high-risk cities stay below their peak, regulatory patience may be the most prudent play…for now.)

Stephen Smith, Chairman and CEO of First National Financial Corporation

  • “If there was anything at all that the government could possibly do, it would probably be reverse the changes made four to five years ago where the maximum loan-to-value would be 80%. They could certainly scale that back down to 75% or maybe even 70%. It would take some of the liquidity away from the marketplace. But generally we’re really dealing with issues that are predictably in Toronto and in Vancouver. And then we have the issues in other markets, which really aren’t crying out for any type of solution. So I think, to a large extent, these things will be self-correcting.”

Martin Reid, President and CEO of Home Capital Group

  • “So a lot of the changes that had come into play in the last five years have really been around prudent lending and I would say that the lending that’s happening today is far more prudent than it was 5, 10 years ago. But what a lot of those changes didn’t address was the supply side. And aside from Vancouver, which is really directed at the demand side, I think you really want to be careful of unintended consequences. You know some of the regulatory changes, B20 for example, did shift a lot of business into the shadow banking sector. The unregulated space may help the regulated lenders but systemically [that] may not have been the most prudent thing to do, in that it’s increasing risk in an area where you don’t have a line of sight. So I think you really want to be careful of the types of changes you put into play and you really do need to address the supply side…That really is the tale of two cities, Toronto and Vancouver, where that needs to be addressed.”

John Webster, SVP & Head, Real Estate Secured Lending at Scotiabank

  • “A lot of the high-end purchases in Vancouver aren’t being financed by lenders and by us, but it does have a downstream effect on affordability. So that is the issue…We’ll have to see whether or not that measure has some impact [and] whether equal measure should be brought to bear in other markets.”
  • “One of the things that the industry has done that you may not be familiar with, we’ve always, with the exception of the 5-year term, been underwriting to…the Bank of Canada posted rate, which can be as high as 200 basis points higher than the effective contract rate. The only terms that doesn’t apply to is the 5-year+ category. Lenders have [suggested] to [the Department of] Finance and OSFI that we would be willing to undertake that [i.e., apply the posted rate to 5-year fixed terms], to give a little bit more interest rate cushion. But so far what I would say, witnessing the behaviour of our borrowers…Canadians do value home ownership and they are in as quick a hurry as possible to pay down their mortgage. So even if they take a longer amortization, then they’ll do bi-weekly payments and…we still have big pay downs every year…I would say that most of my competitors worry about the fact that the portfolio runs off too quickly, not the other phenomenon.”
    .
    (The Feds have been seriously considering whether to make 5-year fixed borrowers qualify at the posted rate, which is 4.64% today. Compare that to current qualification rates, which can be 2.39% or lower. Any mortgage originator can tell you what a sizable impact this would have on approval rates.)

Story by Steve Huebl & Robert McLister

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Canada’s banking chiefs gathered recently in Toronto for the 17th Annual Scotiabank Financials Summit. There, they shared their take on topics ranging from mortgage growth to regulation to advancements in mortgage technology. Some of it will put you to sleep, but there are lines below that are a must-read.

We’ve plucked out some of the most relevant mortgage tidbits and sorted them by category. Key quotes are in blue and our comments are in italics


On advancements in technology:

Brian Porter, President and Chief Executive Officer of Scotiabank

  • “In terms of technology–look, we are dead serious about this, we have recruited some very good people from outside the bank… So we are partnering with a lot of people in the FinTech space, we are doing a lot of things up in Tangerine and Tangerine is a full service bank now and we are making, I think, very good strides there.”
  • “…We do not want to be caught in a mode where we are reactive all the time. We want to be proactive…The mortgage application process [for example] – you only have to visit the branch once, not two or three times like you used to. So it is just focusing on the customer, being thoughtful about it, and focusing on the pain points.”

Bill Downe, Chief Executive Officer of the BMO Financial Group

  • “…We spent enough time thinking foundationally about how we were going to invest…New product introduction is much faster and much less expensive as a consequence of the foundational changes that we made.”
  • “So as an example, e-Signature was only just legalized in Canada in the last 90 days and we rolled [it] out almost immediately…Within less than three months [we created] the ability to open an account on a mobile device in less than seven minutes. That was enabled by two things. It was enabled by a change in legislation that recognizes we are going to a more digital world. But it was enabled more by the work that we did in 2011, ’12, ’13, and ’14 on the underlying foundation.”

David McKay, President and Chief Executive Officer of RBC

  • “…as far as Fintech goes I think there is a lot of investment. But what makes some of the Fintech traction difficult is that–[and] this is true of the Canadian industry–you have got a customer that is embedded in a multi-product relationship, particularly if you have got the core checking account as I have said off the top, which is so important. And that multi-product relationship is reinforced particularly in our franchise by reciprocity…you get free banking if you have a multi-product relationship…you get discounts on your mortgage…you get higher GIC rates…you get reward points on your credit card. So we are constantly…reinforcing that the more business you bring us the more you get in return and therefore decoupling a product into a Fintech competitor is expensive. And there is not a price point that you can hit that replaces the relationship value of having four or five products, which is why the cross-sell ratio is so important. We are the number one cross-sell bank in the country. So when I think about Fintech and what they have to do to be successful, they have to take apart a deeply embedded, multi-product, highly reciprocal relationship that is going to cost the customer money to do that.
    .
    (The question mortgage brokers would ask is, will this “cost” to the customer be more than the savings that the customer enjoys by purchasing a la carte financial products outside their bank? By way of example, a 15 bps rate savings on a $250,000 mortgage and/or a $2,500 mortgage penalty savings—versus a Big 6 mortgage—quickly makes up for free banking.)

Louis Vachon, President and Chief Executive officer of the National Bank

  • “…in about 75% of the cases you can either deal in branch or with a mobile mortgage development manager, mobile sales force. If you have all your documents, we will scan your documents, get an approval within the same day and you don’t need to go ever again to see [a bank rep] to get approval. You get one meeting, one approval and straight-through processing. No one to our knowledge does that in the industry right now.”
  • “The last piece we’re looking to do now is to do that online. Now, you have to physically bring your documents so we can scan your documents. The next step will be to do it online and have the full straight-through processing. So in terms of cost and efficiency… we’re doing a lot of work now where digitization and automation is being deployed. So we still have room. We still see areas, low-lying fruits that we feel we can get to those costs. That’s why we’re still comfortable, very much comfortable with the $95-million run rate target for that three years that we’ve given in terms of cost reduction.”

 

On the housing market

David McKay, President and Chief Executive Officer of RBC

  • In response to a comment about RBC seemingly having taken its foot off the gas in residential real estate in Canada: “I would say it is not true because we have gained market share in residential mortgages…But we are starting from the highest base by a long shot. We are two times the size of many of our competitors. So we are still gaining market share in mortgages but not in Vancouver. So with this conscious choice we have made, which came out in the Analyst Call and our Quarterly Earnings Call, we certainly feel much more comfortable about Toronto given the diversity of the economy, the number of new immigrants coming in, the household formations, the manufacturers. I think it is a more stable market to invest in right now. So you are seeing some of our market share gains in Ontario, which is a very strong economy in Toronto but not in the western part of the marketplace, so I think that has been conscious.”
  • “…we have gained share on mortgages but it is not (in the) west and we are not over–we are under-indexed in Vancouver as you heard me say. We are about on average index in–it looks like in Alberta at 16% of our portfolio… I think banks are in that 14/15/16% range so we are roughly somewhere there. So I think that is the volume story and we can do a little bit better, but you have got to be careful right now.”

Victor Dodig, President and Chief Executive Officer at CIBC

  • “I think over the next period you will see more normalization as the first line effect kind of runs off. And as…various governments put in policies of their own to temper the growth of mortgages. I mean fundamentally a lot of policies can be introduced. I think the fundamental issue that is going on in the world today is money is mispriced–that is the biggest issue. And at some point I am hoping that there is some coordinated intervention around the world that will get interest rates back to a normalized level to get the world back in the fairway again. I mean that is a problem right now–savers are being punished, asset values are increasing largely because money is mispriced.”
    .
    (Interesting comment. The price of money is set every second of every day by the free market, the $100-trillion global bond market, the most efficient price discovery mechanism the world has ever known. But somehow, money is mispriced? No. Interest rates reflect the cold realities of a disinflationary environment that resembles nothing in modern history.)
    .
  • “So if you look at CIBC’s growth profile we have been growing mortgages, but if you look at the quality of those mortgages, regardless of whether they are insured or uninsured, [they are] high quality based on the Beacon Score, based on what clients are doing with us in addition to those mortgages…So I think we have been on a path of really, really balanced growth and as much as everybody wants to point out the mortgage issue—yes, house prices have gone up. Yes, they have gone up too much but is the root cause because we have been lending at the level we have or is the root cause more the level of interest rates in our country? And it is not just our country, it is around the world…”
  • Asked if CIBC has adjusted its origination criteria in certain parts of the country: “No. Listen, we are very thorough in how we do things. We have been very thorough after the financial crisis as a low-risk bank…as I said it is a slightly different course. You do not abandon your lower risk principles. They are embedded in how we do business.”

 

On mortgage portfolio growth

Victor Dodig, President and Chief Executive Officer at CIBC

  • “Banking is all about managing risks, but it is also the size of the risk that you take. If you look at the mortgage growth, which is often pointed out as ‘Wow, how come they are growing mortgages faster than everyone else?’ Maybe it is because we are competing in a better way than everyone else, maybe it is because we have invested in our business. And I say maybe but truly we have. If you look at our mobile advisor force we have the second-largest mobile advisor force in the country. If you look at it three or four years ago it was nowhere near that size.”
    .
    (Other banks are watching CIBC’s above-average growth rate, post-broker. The haunting question in our industry is, will another bank follow in its footsteps?)
    .

Paret Masroni, Group President and Chief Executive Officer of TD Bank Financial Group

  • In response to a comment about TD’s Q3 mortgage growth coming in well below its peers: “I think you know [that] growth numbers…sometimes [don’t]…tell the whole story. For TD we have sizable market share and you know, when year-over-year growth may seem a little different than from some of our competitors, I think it’s also important to notice what base you’re counting the growth from. And we feel happy with how we are growing our book…We’ve had a consistent underwriting stance for many years, especially the last four or five years now. But…the diligence around our underwriting has probably become more strict then we might have had, you know, a few years ago.”
  • “…so would we be more diligent in the type of appraisals we would demand or accept, would be more focused on income verification for example, would we track our exceptions to policy when we approve certain types of mortgages, and are we more diligent about it? So all those might have some implication on our rate of growth, but that’s been consistent over a few years and I wouldn’t want that to come across as TD…consciously pulling back to a great extent. I think you’d expect from TD to do the prudent thing and that’s what we’ve been doing when some of these [home] prices have gone up the way they have, and it’s not just in the last one year, it’s been over a few years.”
  • “… we haven’t stepped back from the market…. And that applies to all the markets that we are in.”

Louis Vachon, President and Chief Executive Officer of National Bank

  • In response to a comment about National Bank’s mortgage growth being strong in B.C. and Ontario, but dropping off in Quebec: “I think still in terms of retail lending, I think we compare well in terms of volume growth of our peers…I want to reassure everybody, we’re not disengaging ourselves from Quebec but I think what’s happening is we are making some choices in terms of channels. We’re still active in the third-party mortgage broker [market] but being a little bit more selective there, so there’s been some decisions made on the channels. And frankly… mortgage lending growth has been a lot higher in Ontario and B.C. versus Quebec so we’re just reacting to macro trends. In the Vancouver market the growth has been mostly in insured mortgages and we’re growing from an extremely slow, small base. So you know I’m not particularly concerned. I think we can sustain a bit of growth in B.C., I think we’ll be fine and still very much within our risk controls and risk parameters.”
  • In response to a question about third-party mortgages and how, if at all, the bank has adjusted its origination criteria: “Our view is more long-term strategic in a sense that we feel that in the relative near future that online origination of mortgages will be a fourth distribution segment. So right now there is in-branch, mobile sales force, third-party mortgage brokers and then a fourth distribution channel which is direct online, either through an aggregator or through a direct basis…The only piece that we’re missing is online origination of mortgages and we feel that we can be an early adopter in that particular space. And we feel that, over time, it’s going to be as attractive if not more attractive for us as a new origination channel than the traditional third-party broker’s market.
    .
    (Remember this last sentence from Louis Vachon. National Bank is to be applauded for sizing up and attacking the online space. But at the same time, a chill should have just passed through the bones of every broker reading it.)

Story by Steve Huebl & Robert McLister

 

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Bank of America Merrill Lynch put out a fantastic primer on mortgage-backed securities (MBS) last week. Here’s a small sampling of its notable factoids:

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Securitization versus the U.S.

Risky mortgage securitization was blamed for feeding the U.S. housing crisis. In comparison, not only is Canadian MBS regulated far more rigidly than that toxic American MBS of old, but our overall securitization share of mortgage finance remains well below U.S. levels (although the gap is narrowing).

MBS Outstanding

There are $440 billion of outstanding NHA MBS in Canada, all fully guaranteed by our government. NHA MBS benefits from Canada being one of only 10 countries in the world with a triple-A credit rating (Australia, Denmark, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland are the others).

Distribution of MBS

The majority of NHA MBS are held in Canada Mortgage Bonds (CMBs), of which there are $215 billion outstanding. Big 6 Banks hold another $172 billion of MBS, leaving roughly $39 billion in the hands of secondary investors.

Canada’s Banks are Titans

Canada’s major banks hold almost twice as much mortgage market share as do U.S. banks.

Regulatory Impact on Credit

Check out how CMHC’s average borrower profile has improved over the past year and a half, thanks in large part to the Department of Finance’s stricter lending policies.

 

Canadian Versus U.S. Delinquencies

Total mortgage delinquencies in Canada have typically remained under 0.50%. Compare that to U.S. prime fixed-rate defaults, which soared to about 2.4% during the financial crisis. Over the past two decades, Canadian delinquencies have never surpassed 0.7%.

Canadian Versus U.S. Insurer Capitalization

CMHC’s insurance in force is $523 billion. Backing that is about $16 billion in capital, or 3%. By contrast, there’s “a congressionally mandated 2% capital target for the FHA in the US,” says BofAML, a capital level that must cover “an arguably weaker borrower credit profile.”


Our thanks to Bank of America Merrill Lynch for making this report available to CMT.

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With home prices rocketing into new galaxies, one might think that loan-to-values are surging. After all, we’re bombarded with headlines about under-capitalized homebuyers struggling to get into the market.

In fact, loan-to-values have held steady for at least nine years running.

From March 2007—as far back as our mortgage balance data goes—to spring this year, Canada’s average home price jumped 70% to $508,567. (Source: CREA)

In that same time-frame, the average residential mortgage surged by a similar percentage: 71%, to $181,000. (Sources: RBC, 2007; Manulife, 2016)

Looking at this another way, the mean equity in a Canadian home nine years ago was 65% (in homes with mortgages). Today, it’s about the same.

Interestingly though, the average mortgage amount has risen $75,443 over the last nine years. But the mean value of a Canadian home has surged almost 2.8 times that, or $209,190. That’s a sizeable net gain in nominal dollar equity.

Of course, what the market giveth the market can taketh away. But that net equity growth, if it holds up longer-term, could be an essential store of wealth for so many with insufficient retirement savings.

Only 1 in 5 middle-income Canadians who are retiring without an employer pension have saved enough to retire comfortably, reports CBC. Imagine if they lost $100,000 to $200,000 of home equity to boot.

This is just one more reason why it’s so utterly essential that policy-makers stack housing policies carefully. It would be one thing for mortgage tightening to cause a correction, but it would be absolutely calamitous if it ever triggered a crash.


Sidebar: These are the average mortgage balances in Canada’s largest cities. How noteworthy that high-priced Toronto is only 7% above average. (Source: Manulife Bank)

$259,000 — Vancouver
$217,000 — Calgary and Edmonton
$194,000 — Toronto
$156,000 — Montreal

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Broker channel mortgage volumes continue to grow, but somewhat slower than the industry average. Overall broker-originated mortgages rose 4.4% in Q2 versus the same quarter in 2015.

Bank share of the broker market fell another 4.1% y/y. That’s on top of the 3.4% y/y decline in Q1. Banks now hold just 30.8% of the broker segment, the least since we began covering this survey (and down from almost 60% in 2010).


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Rising house prices FBMany an armchair analyst has speculated on the factors behind Toronto and Vancouver’s runaway home values. And now, a recent study by RBC Capital Markets brings more data to the table.

According to its report, home prices increased at a compound rate of 5.6% annually from 1999 to 2015 in Toronto and 6.2% in Vancouver, outperforming the S&P/TSX Composite total return of 5.3%.

RBC’s analysis found that four factors accounted for between 85% and 90% of those price increases since 1999:

  1. Lower interest rates
  2. Higher incomes
  3. An increase in the percentage of incomes used to make mortgage payments
  4. Larger down payment gifts from family members.

The remaining 10-15% can be explained by influences that are more “difficult to quantify,” RBC says, such as geographic constraints and foreign buying. Notable is the fact that the first two variables account for almost three quarters of price appreciation, its authors claim.

Interestingly, this data doesn’t cleanly mesh with earlier studies from the likes of the Bank of Canada. A 2012 BoC research paper found that the jump in real house prices between the fourth quarter of 2001 and the third quarter of 2010 were driven by:

  • Increasing population: 33%
  • Rising real household disposable income: 24%
  • Declining real effective mortgage rates: 13%
  • Other factors, including “recovery from the sluggish price growth of the 1990s”:  29%.

Whatever the actual numbers, if the floor falls out in the housing market, RBC says that changes in home prices are not good predictors of mortgage loan losses in Canada. “…Job losses (not price declines) are the better leading indicator of potential future losses for lenders/insurers,” it notes. That’s some consolation for Toronto and Vancouver, which have “amongst the best economic and employment growth rates within Canada.”

Other specifics from the report:

Over the period from 1999 to 2015, RBC says:

  • Interest rates are estimated to account for 39% of the increase in home prices in Toronto and 34% in Vancouver;
  • Higher after-tax incomes are estimated to account for 29% of the increase in home prices in Toronto and 40% in Vancouver;
  • The tendency of borrowers to set aside a slightly higher percentage of after-tax income to make mortgage payments is estimated to account for 17% of the increase in home prices in Toronto and only 4% in Vancouver;
  • Larger down payment gifts from family members are thought to account for 5% of the increase in home prices in Toronto and Vancouver;
  • Geographic constraints, such as scarcity of buildable land, have limited residential development and densification. That too has contributed to rising home prices—as have higher municipal charges, labour and materials costs;
  • “Foreigners are likely small in number, but arguably significant in impact,” says RBC. “Although it is likely that ‘foreigners’ do not comprise a significant percentage of home sales, they are arguably the marginal buyer…for those buying in the high end of the market.” Contrary to some other economists, RBC says, “…They likely drag up home prices in the mid- and low-end of the market” and impact everyone (although, the report doesn’t speculate on how much, and cautions that its data on this is anecdotal and unclear);
  • Immigration is yet another home appreciation catalyst, “particularly the investor immigrant program for wealthy applicants.” International buyers also love our weaker loonie, which makes Canadian homes appear “on sale.”

The report makes one other interesting point about Chinese buyers. RBC states that, “If launched, China’s Qualified Domestic Individual Investor program (QDII2) has the potential to be a material driver of further home price appreciation in Toronto and Vancouver.” This is a factor that hasn’t made a lot of headlines. Although, RBC notes that the program’s launch date is still unclear.

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Report Review FBMortgage Professionals Canada released its spring report on mortgages and housing this week. More so than in previous reports, this one was opinion-heavy on the overall affordability and sustainability of housing.

MPC’s Chief Economist Will Dunning has long held that mortgage rule tightening could trip up the economy, noting that “…the greatest risk to the housing market (and consequently to the broader economy) is not reckless consumers or lenders – it is needless policy changes.”

That position has been well covered by the media so we won’t belabour it here. Instead, here are four other quotes that deserve attention — this author’s feedback is in italics.

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  • “Our review of housing market data convinces us that changes in housing prices are fully respective of interest rates.”
    • Affordability is a forceful lever and falling mortgage rates have been the fulcrum for that lever. Nonetheless, home prices also hinge on things like shortages of detached homes (in certain major metros), urbanization, income/jobs gains, natural population growth and immigration. Prices will continue reacting to these factors regardless of modest rate changes and policy tweaks.
  • “…a few senior executives in the financial services sector claim to see increased risk and are calling for tighter lending criteria. We would be interested in seeing the supporting data.”
    • Everyone should join in agreement on this one. Using a public podium to advocate housing changes (with potentially significant economic impacts) should obligate one to support that advocacy with hard data. 
    • Dunning goes on to say: “Mortgage lenders who are concerned about current risk-taking could very easily and very usefully add to the discussions by publishing data from their own businesses, especially with regard to Gross Debt Service Ratios and Total Debt Service (TDS) Ratios.”
    • Plotting debt service ratios over time is vital for housing risk analysis because it tracks how capable people are of making their payments. It’s especially telling if you know how many people have high debt ratios. Industry resources like CMHC and OSFI have had aggregate TDS data like this for ages but refuse to make it publicly available.
  • Will Dunning“The gap between posted versus actual rates has gotten increasingly large over time, and that change has implications for the reliability of any analysis that uses posted rates.”
    • Dunning is correct here as well. Few useful conclusions can be derived from posted mortgage rates, since almost nobody pays them. The Bank of Canada has ample discounted mortgage rate data but declines to make it publicly available. That’s a disservice to housing analysts across the country. Hopefully Mr. Dunning makes his discounted rate data available as well.
  • “At today’s typical mortgage interest rate (2.5%), and assuming an amortization period of 25 years: for the first payment, more than half (53%) is repayment of principal or forced savings.”
    • This “guaranteed savings plan” is one reason why, each and every day, more people view home ownership as their retirement saviour. Over one-third of Canadians expected to rely on home equity to fund their old age, according to Scotiabank in 2012. With inadequate savings and meagre investment returns, that number has likely grown, and will continue to grow. Ottawa best take care to balance its desire to slow and de-risk housing with preserving this critical retirement safety net for millions of Canadians.