Results for home buyers are still 'two years away' as CMHC embarks on a new frontier

Mortgage brokers say the borrower rejection rate from large banks and traditional monoline mortgage lenders has gone up as much as 20 per cent after Canada's banking regulator imposed a new stress test for home buyers who don't need mortgage insurance. Sean Kilpatrick / THE CANADIAN PRESS

Stuart Thomson, March 21, 2019

The reviews have been mixed on the merits of the government’s new scheme to help first time home buyers, but there is consensus emerging that the effects won’t be felt in the housing market until as late as 2021.

“The real impact of this is probably two years away,� said Paul Taylor, the CEO of Mortgage Professionals Canada.

The first time home buyers incentive plan, announced in Tuesday’s budget, gives buyers with a household income below $120,000 an incentive of up to 10 per cent of the mortgage amount. That will lower mortgage payments, but the buyer still has to pay the full down payment and the incentive funds will have to be repaid to the government.

The incentive on existing homes is five per cent and up to 10 per cent on newly constructed homes, which the government hopes will juice new construction in markets that are struggling with low supply.

The incentive program requires legislation to pass through Parliament, with the launch planned for September. Taylor worries that the delay could see a stark pause in construction as buyers bide their time for the next six months.

“You are going to get people just waiting,� he said.

Capital Economics, an economic research firm, agreed with Taylor’s concerns in an analysis released on the heels of Tuesday’s budget.

“It will be at least 18 months before any meaningful boost to construction from the equity loan scheme is felt. In the meantime, the softness of new home sales means that new construction is set to fall sharply,� the report reads.

Potential home buyers and industry representatives had been calling for a variety of measures in response to worsening affordability across the country, like an easing of the mortgage stress test or beefed up credits for buyers.

Taylor had been calling for the maximum amortization period of a mortgage to be boosted to 30 years, from the current 25 years. The incentive plan — which comes in the form of shared equity mortgages through the CMHC — surprised him but he’s not necessarily opposed to the idea.

“I’m not concerned but I’m a little puzzled by it. It’s a different mechanism, for sure,� said Taylor. “The fact that they’re trying to do something creative actually doesn’t worry me.

“(But) most of our community is really quite disappointed that there wasn’t some easing of the stress test or the introduction of a 30-year amortization,� he said.

Francis Fong, the chief economist at the Charted Professional Accountants of Canada, said the CHMC is embarking on a new frontier as it acquires a direct stake in the residential mortgage market, rather than just providing insurance. That new frontier also means a new form of risk for the CMHC.

“That’s why I am so glad they didn’t let up on the mortgage stress test,� said Fong.

The idea of the CMHC taking a stake in mortgages may bring up faint memories of the 2007 subprime mortgage crisis in the United States and Fong said he gets a “jittery feeling� about that, but that all the data suggests there isn’t much to worry about.

“Are we there? The answer is categorically no,� Fong said. Credit quality has been getting better and “the evidence speaks for itself, so at this stage I’m not worried about it.�

Along with all those positive indicators, the new $1 billion program adds up to less than one-per-cent of the total amount of mortgages insured by the CMHC.

Fong said his preferred solution would be an expansion of one of the under-the-radar measures announced in the budget designed to get more houses built, which would eventually put downward pressure on prices.

An expert panel was created in British Columbia to advise on solutions for boosting housing supply and the government also announced a $300 million program for municipalities and other groups across Canada to propose creative solutions to the problem.

Those initiatives show “they don’t have the answer, bottom line,� said Fong. “It also shows they’re grappling with the role of the federal government� in addressing the housing supply problem.

NDP MP Peter Julian, who represents a B.C. riding, said they government’s incentive program will simply boost prices without actually helping anyone get into the market.

“What troubles me is that it’s not an effective approach. It seems to be kind of a throwaway program,� said Julian, who expects the housing issue to haunt the Liberals in the upcoming federal election.

“I think they have misread the public mood and they have certainly misread how Canadians view the housing crisis.�

Email: [email protected] | Twitter: @stuartxthomson

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