5% Down Payments at Risk? Canada’s housing agency says it must “avoid exposing young people” and “taxpayers” to “amplified losses that result from falling house prices.” CMHC CEO Evan Siddall said today, “Unless we act, a first-time homebuyer purchasing a $300,000 home with a 5% down payment stands to lose over $45,000 on their $15,000 investment if prices fall just 10%, which we are forecasting.” CMHC says its calculations include the mortgage insurance premium and the costs of selling the home if forced to do so because of unemployment or any other reason. “In comparison, a 10% down payment offers more of a cushion against possible losses…We are therefore evaluating whether we should change our underwriting policies in light of developing market conditions.”
What it Could Mean: Some will take Siddall’s comments to mean the days of 5% down payments are numbered. Siddall told Parliament’s Standing Committee on Finance that, “We’re talking to our board of directors this week…we may restrict the business we do in the short run.” But Siddall tells us that “We have made no decisions” with respect to down payments, and reminds us that down payment increases on insured mortgages would be the Minister of Finance’s purview, not CMHC’s. And “there’s no talk of that [e.g., 10% minimum down payments across the board] right now.” Indeed, a 10% minimum down payment would protect borrowers, but it would also be pro-cyclical, meaning it could remove demand from a weak market and accelerate price declines. That’s why Siddall adds, “We need to be careful not to act precipitously” and he stresses that “We expect any economic slowdown to be temporary.” CMHC is projecting a rebound in housing to pre-COVID levels by sometime in 2022.
There are Still Two Other Insurers: It’s possible that one or both of CMHC’s two private competitors could continue insuring mortgages in market segments that CMHC pulls back on.
But Wait There’s More: Here’s what else Siddall said that will raise concern:
“CMHC is now forecasting a decline in average house prices of 9 to 18% (peak to trough) in the coming 12 months…There will be greater declines in oil-producing regions (Alberta, Saskatchewan and Newfoundland) and in places where house prices got ahead of themselves (Toronto and Vancouver).”
“Something like 2% of insured mortgages could experience losses,” he says, stressing that forecasting with accuracy is almost impossible given so many unknowns.
“Trees don’t grow to the sky…The musical chairs game [with housing] is going to come to an end…and young people, who are very highly leveraged [could suffer].”
CMHC says almost 20% of mortgagors will have requested mortgage payment deferrals by September.
The housing agency is planning for a “growing debt ‘deferral cliff’ in the fall,” Siddall says. At that time, deferrals are expected to end and many unemployed Canadians won’t be able to make their mortgage payments.
Ultimately, “As much as one-fifth of all mortgages could be in arrears if our economy has not recovered sufficiently,” he warns.
Debt-to-GDP ratios above 80% tend to intensify “the drag on GDP growth,” he stated, and Canada’s could reach 130% by Q3 before declining somewhat.
The more commonly cited debt-to-disposable income measure will climb from 176% (and we thought that was high) to as much as “230%…through 2021,” depending on how much GDP falls.
“Canadians do a very good job of paying their mortgages even when they’re underwater.”
Economic Perspective: Canada’s economy will plunge 41.3% annualized in the second quarter, according to the average analyst surveyed by Bloomberg. That’s an utterly unfathomable number — one that’s never been equalled in a single quarter. So, given that mass unemployment trumps tight supply, low interest rates and other bullish housing factors, CMHC has ample reason for concern. It seems highly likely that Canada’s top default insurer will suspend some mortgage programs and/or tighten qualifying rules in the weeks ahead.