Canada’s National Housing Agency Tightens Lending Ahead of Forecasted Price Declines

Canada’s national housing agency isn’t just forecasting price declines, they’re preparing for them. Canada Mortgage and Housing Corporation (CMHC) announced changes to its mortgage insurance. Homebuyers with less than 20% down should now expect lower debt service maximums, a more stringent credit quality check, and a ban on borrowing down payments. If those sound like good things, that’s because they are… unless you’re trying to sell the borrower a home.

Maximum Debt Service Ratios To Decrease

The new policies lower the maximum debt service ratio – the amount of income used to make payments. The maximum gross debt service (GDS) will be set firmly at 35%, from a maximum of 39%. The maximum total debt service (TDS) will drop from 44% to 42%. The higher ratios were only available at some lenders, for people with excellent credit scores. However, that option will no longer exist – at least for the next few months.

What kind of impact will that have on buyers? This should translate to a drop of 11% in buying power for someone with few to no bills other than their mortgage. Additional debt would weigh it down further. Once again, this was only available to people with great credit, but no longer is an option. Most likely because the next rule is you need better credit to qualify anyway.

Canadian Homebuyers Will Need A Higher Credit Score

The CMHC is looking for higher quality credit for insured mortgages. The new minimum for credit scores will be 680, up from 600. In Equifax terms, this means credit considered “fair” will no longer qualify as a minimum. This is similar to an informal trend in the US earlier this year.

How this impacts the market will be a little more tough to estimate, but we can give you an idea. Equifax data shows just 14% of the total mortgage market would rank above that threshold. Now, not all of those are insured mortgages – which are more likely to have more green credit. An additional data point to consider TransUnion recently told clients 5.5% of accounts moved from the prime to non-prime segment. This trend is expected to accelerate, as a “severe” scenario plays out. Their words, not mine.

Say Goodbye To Borrowed Down Payments

The CMHC will no longer count borrowed and insured funds as equity. This would mean people will have to find the whole down payment. Tragic, I know. Data from Mortgage Pros Canada (MPC) shows 52% of first-time homebuyers borrowed funds for a downpayment. Two-percent of first-time buyers borrowed 100% of the down payment from family. Another 5% relied on loans for at least half of their downpayment, but less than the total. The impact most likely wouldn’t deter these buyers, but instead delay them. An important point if a sudden spike of liquidity were to occur, like a negative cap investor sell off.

Insured Mortgages Represent 35% of Mortgages In Canada

How big is the insured market? Insured mortgages represent 35% of mortgages at chartered banks. The majority are likely recent buyers, since very few markets would have less than 20% equity over 5 years. MPC data shows from 2015 to 2019, 49% of first-time buyers had a downpayment smaller than 20%. So it’s a substantial portion of the market.

The CMHC manages insurance for mortgages, therefore assessing risk is a primary task. If they’re putting up hurdles for buyers, it’s to prevent default risk (and taxpayer liabilities) from climbing. They didn’t just forecast real estate price declines last month. They’re now preparing to avoid exposure to these declines. In the insurance industry, this is putting their policy where their mouth is.

So what? It’s just the insured market, the general market is going to be fine, right? An easy way to understand the short-term impact here is to do what all Realtors say – think of the market as a property ladder. As buyers on the first rung move up, they need to find someone to take their position. If home prices are falling, and there’s a smaller pool of qualified buyers – they may not be as motivated to move. With fewer buyers ready to take on financial risk, shrinking demand works its way up the ladder.

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  • Rob 4 years ago

    Only really impacts poor people buying homes.

    • Trader Jim 4 years ago

      Not really. Marginal price influence. The motivated buyer or seller is the one that moves prices, much beyond fundamentals in either direction.

      That’s one of the issues with “fair value is lower.” The fair value higher meant nothing, because everyone needs to follow the opaque comp system.

      • Dan Dekker 4 years ago

        Kindoff sucks because the Home I currently don’t qualify for may just come down to a price that I could afford after this recession. But now my affordability range just shrunk also. So still in the same boat. Need even more cash now. But I’ll take Falling prices over more debt anyday, going in the right direction. I’ll figure it out.

  • Marcel Forster 4 years ago

    lol. This is so funny to see, considering everyone taking possession of new construction was planning on flipping to first-time buyers that couldn’t afford the 20% down.

  • Amy 4 years ago

    This is just CMHC. Other insured borrowers don’t have to follow.

    • Mortgage Guy 4 years ago

      I don’t believe that detail has been clarified yet, but other lenders would normally voluntarily follow the rules in order to make sure they aren’t disproportionately stuck with worse quality borrowers than the CMHC.

      It shouldn’t surprise people if major banks follow this path. Risk quality is important to lenders, and no one wants to be stuck with the worst of the lot. Credit Unions mostly did this with B-20 Guidelines.

      • Manu 4 years ago

        CMHC has all right and duty to protect Canadian tax payers money. Any loss incurred by them is actually a loss to Canadian.

        They are late but good is they are on track. CMHC earlier policy was promoting dollar inflation to property price.
        Current policy will bring equality and stability.

        • zalzon 4 years ago

          what’s the point of doing it now when the whole real estate pyramid scheme is ready to collapse – a mess that they were instrumental in creating in the first place.

          were they sleeping from 2008 to 2020 when they insured hundreds of billions of sub-prime mortgages with taxpayers as a backstop.

    • Jason Lang 4 years ago

      Genworth and Canada Guaranty are also backstopped by the governement, although I belive they are 90% backstopped vs. 100% for CMHC. They will likely need to follow suit with the CMHC changes, although I will be interested to see any comment here, or articles elsewhere on the topic.

      • Michael Wright 4 years ago

        It’s ridiculous the government ever allowed taxpayers to enter agreements they know will be risky. We do this with corporate debt too.

  • Michael Wright 4 years ago

    Nice. They drove a bubble and are now pretending they’re the voice of reason. How about the moral hazard and speculation driven in the first place?

  • Lok 4 years ago

    To be honest even if prices drop 50% in Toronto or Vancouver its just back to normal affordability. Its time to left real estate prices come back down or we are headed for serious trouble.

    • Mtl_matt 4 years ago

      The median detached home in Vancouver would need to fall by 72% to be at 5 times the median family income (if you take 3-5 time family income as your historical ratio to income).

      The same napkin math works out to a 42% drop for Toronto, and 23% for Montreal.

      IMHO even 5 times median income is high for a place with such high taxes and cost of living as canada (food, heat, clothing, etc). It’s more for US states with low income tax and/or where interest is tax deductible.

      • ADH 4 years ago

        This guy gets it. This information is exactly the explanation this country needs about what they have done to future generations attempting to live here.

      • Gabriele Di Bernardo 4 years ago

        Mtl_matt is exactly right.

  • straw walker 4 years ago

    35% of mortgages are 5% CMHC mortgages.. This is not what CMHC was intended. Now the BOC is buying up these mortgages that no one wants as Mortgage Bonds that are actually junk bonds.
    These mortgages have the highest percentage that are now in furlough, and the 5% down is now underwater as real estate prices continue there decline.
    Government policy of expanding an economy by expanding debt has reached it’s limit, and is now bankrupted our economy.
    What a mess…
    Canada a country of nearly 200 years collapses in 2 years.. of missed management.

  • Manoj 4 years ago

    Could not agree more with @Straw Walker.
    The Globalists and their Cronies have cashed their fortunes and destroyed Canada’s economy and the hard working Canadian’s (tax payers) will get slaughtered. The Cronies will get bailed out and they will buy up the cheap real estate. This happened 100 years ago and it is about to repeat again.

  • zalzon 4 years ago

    @Straw Walker and @Manoj are absolutely right.

    CMHC has already done huge damage to the economy by saddling the taxpayer with insuring hundreds of billions of sub-prime mortgage junk at below market rates (i.e. no participation of private insurers to price the massive risk of mortgage default).

    With the crash impending, CMHC is scrambling to deflect attention of its misdoings with a song & dance about how vigilant they are when it comes to insuring junk mortgages.

    But hello, the horses have already left the barn ages ago. This vigilance should have began at the very least in 2008. Yet even after US economic implosion due to the sub-prime debacle in 2008, CMHC *continued* to pile ever larger amounts of sub-prime mortgages onto the backs of taxpayers. WHO made this decision.

    Evan Siddall who sits as head of CMHC cannot claim ignorance of the consequences when the cause of it and the associated moral hazard was front page news in 2008/9 for our neighbour to the south.

    Someone needs to go to jail for this.

  • Richard 4 years ago

    CMHC has made $17 BILLION in the last 10 years off the backs of Canadians.
    Just during the great recession they made about $1.2 billion+ with lending fees.
    Now they want to cover their backs and inciting doom and gloom. CREA has already mentioned they bluntly disagree with CMHC. I am with CREA.
    We have the lowest default rate in North America. The default rates that CMHC is quoting is due to the mortgage deferral, which is NOT mortgage default.

    • KL 4 years ago

      CREA initially said any forecast they could provide would be unreliable, then provided one subsequently.

      You have a gross misunderstanding of the CMHC’s position on forced sales. They said forced sales, not mortgage defaults. A forced sale is one where a person may have to move for a new job, or finds the cost balance is no longer worth it (for instance, if they begin to work remote). There’s also the issue of AirBNB and negative cap condo investors, which may no longer find the value worth it. These are forced sales, but NOT mortgage defaults.

      It’s banks, credit unions, and mortgage lenders with higher PCLs, and credit agencies forecasting higher rates of arrears.

      I get that you’re a salesperson and have an implicit bias towards the positive, but so am I and I realize I’m not doing anyone a favor by telling them there’s no risk. If you can use the word “unprecedented” to describe the slowdown in sales, you can’t say this is how it has historically played out. It’s by definition, unprecedented.

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