Canada’s Strong Housing Finance System: Still a Reality?

Canada Flag by RichardBH

For quite some time, Canadians have been very self-confident with their housing finance system. We weathered the crisis much better than other countries and believed that our success based on good management and design spiced with a bit of luck was destined to last. However, while just a short time ago, experts delivered reports on reasons for our economy’s outstanding performance, our future prospects seem much cloudier these days. Let’s summarize some of the main points that are often cited as reasons for minimizing the impact of the recession on the Canadian economy.

First of all, our mortgage system assisted potential homebuyers all across the social spectrum to get access to reasonable housing that they were able to afford. Mortgage lenders traditionally chose a more conservative approach and risks were carefully assessed loan by loan. Furthermore, the housing finance system was believed to maintain a competitive environment among lenders, leading to a diverse market with a variety of products that served all Canadians, carefully supervised by larger institutions.

In 2010, Karen Kinsley, president and chief executive officer of the Canada Mortgage and Housing Corporation (CMHC), wrote:

“As a large public mortgage insurer, we are also able to set the tone throughout the industry for underwriting standards and quality. By being everywhere in Canada, CMHC is also able to pool risks across all of Canada’s economic zones.”

Downtown Toronto by Nic Redhead

Another reason for Canadian success could be our ability to bridge gaps in the system. While 80 per cent of Canadians are able to reach for the mortgage they need without assistance, 20 per cent of low-income citizens were aided by government programs administered by CMHC. Unlike the U.S., where large bodies partially sponsored by the state couldn’t figure out their role on the market, ending up in a disastrous lending policy to insolvent customers, Canada managed to separate business and assistance programs.

So what happened to the Canadian housing finance system these days, as it seems we are facing more and more troubles? Analysts are talking about the inevitable burst of the real estate bubble in Toronto and Vancouver condo markets, some predicting a more than 25 per cent crash. Canadian housing prices don’t seem sustainable anymore and governor Carney quoted excessive mortgage-related lending as the number-one domestic risk to the Canadian economy. To tackle this messy and largely unpredictable threat, economists and politicians have undertaken steps that indicate hard times to come.

Flaherty’s government announced several changes to mortgage insurance rules, such as reducing the maximum amortization period to 25 years from 30 years. Additionally, the maximum amount of equity people can take out of their real estate ownership in refinancing is about to get lowered to 80 per cent from 85 per cent. In the future, no insured mortgages will be provided for home purchases above $1 million and this new rule is introduced to ensure that the gross debt service ratio remains at a reasonable level for every family, as the ceiling is set at 39 per cent.

Right now, CMHC seems to take little notice of the overheating warnings in their analyses. The corporation forecasts a moderate rise of prices until the end of the year and doesn’t expect any dramatic misbalance on the real estate market. Let’s all hope they’re right.