Canadian Real Estate Market and Home Ownership House of Commons Standing Committee on Finance Québec Federation of Real Estate Boards January 2017
Table of Contents INTRODUCTION... 3 SUMMARY... 3 THE NEW RULES... 4 QUÉBEC: A DIFFERENT CONTEXT... 4 HOME OWNERSHIP IS HEAVILY PENALIZED IN THE PROVINCE... 4 REDUCED COMPETITION IN THE MORTGAGE MARKET... 5 INCREASING MORTGAGE RATES... 5 INCREASE IN MORTGAGE INSURANCE PREMIUMS... 6 SOLUTION STRATEGY: ENHANCEMENT OF THE HOME BUYERS PLAN... 6 CONCLUSION... 7
3 INTRODUCTION The Québec Federation of Real Estate Boards (QFREB) would like to thank the House of Commons Standing Committee on Finance for the opportunity of presenting our brief in connection with its study on the Canadian real estate market and home ownership. The QFREB is a non-profit organization representing the province s 12 real estate boards and some 13,000 member real estate brokers. It was created in 1994 following the adoption of the Real Estate Brokerage Act (REBA). Its mission is to support, defend, protect and promote the interests of Québec real estate boards and brokers by providing services in professional practices, public affairs and market analysis. The QFREB is guided by an approach that is centred on collaboration and resource sharing. In this document, the QFREB presents its findings and recommendations on the challenges of home ownership in Canada, in particular for first-time home buyers in Québec. SUMMARY The QFREB welcomes the changes to mortgage rules introduced in recent years by the Department of Finance to ensure the soundness and long-term stability of the Canadian housing market. However, with regard to the measures announced last October 3, we are concerned that the new rules: - are not appropriate to the context of the Québec housing market; - heavily penalize first-time home buyers and will consequently curb home ownership. Moreover, we believe that these rules will result in: - a reduction of competition in the mortgage market; - an increase in financing costs; - an increase in mortgage insurance premiums. To counter some of these adverse effects, the QFREB proposes that the government enhance and improve the Home Buyers Plan (HBP). Finally, the QFREB encourages the government to begin a process of reflection with all stakeholders on the best practices to adopt to ensure the prosperity of the Canadian real estate market.
4 THE NEW RULES On October 3, 2016, Finance Minister Bill Morneau announced three new measures affecting the Canadian housing market, the primary one being the introduction of a mortgage rate stress test. These measures follow others announced on September 9, 2016, by the Office of the Superintendent of Financial Institutions (OSFI) concerning financial institutions and mortgage insurers. The cumulative effects of these tighter mortgage rules will act as a brake on the housing market and excessive household debt. Even though a slowdown might be considered as advantageous for some Canadian real estate markets that show clear signs of overheating, this intervention could prove excessive in other regions where the housing market does not have such problematic conditions. QUÉBEC: A DIFFERENT CONTEXT Since 2012, when the maximum amortization period was reduced from 30 to 25 years, the Québec real estate market has been experiencing a soft landing. In many regions, market conditions are balanced or favour buyers. The median price of a single-family home rose by only 5 per cent in the 2012 2016 period. In 2016, single-family home prices rose only slightly in some regions, if at all, and condominium prices fell in many regions due to oversupply. Accordingly, not only is the Québec residential real estate market not overheated, but a further slowdown could lead to a general decline in prices. It goes without saying that a home is the primary asset of households. Its value supports confidence levels, home renovation expenses and other household consumption expenditures. We do not see the benefit to current homeowners of having the government implement interventions that will bring about a decline in property values. Despite the price increases of the past two decades, property prices remain relatively affordable in Québec, especially in comparison to other provinces 1. Québec should not suffer the consequences of overheated real estate markets in Toronto and Vancouver, in which the problem is primarily insufficient supply. To this end, is it appropriate that the qualifying conditions for mortgage insurance be the same in every market? HOME OWNERSHIP IS HEAVILY PENALIZED IN THE PROVINCE First-time home buyers are of paramount importance to the Québec real estate market, which posts the lowest homeownership rate in Canada. According to 2011 census data, 61 per cent of Québec households are homeowners, compared with 70 per cent or more in other provinces. In recent years, Québec residents have benefited from relatively affordable property prices and historically low mortgage rates to make up lost ground. It is easily demonstrable that households that have become homeowners in the past decades have seen their net worth rise faster than that of tenants, i.e. buying a property was a good investment, not to mention the significant improvement in the quality of life that comes from owning your own home. 1 The average price of a property in Québec, all property categories combined, was $281,000 in 2016, compared to $471,000 across Canada.
5 However, the introduction of a mortgage rate stress test for high loan-to-value mortgages (i.e. when the down payment is less than 20 per cent) requires borrowers to qualify at the Bank of Canada s benchmark rate for five-year conventional mortgages. At the moment, this involves the use of a hypothetical interest rate that is 2 percentage points higher than rates offered by most lenders. It goes without saying that a large number of potential buyers will no longer be eligible. For the most part, this will affect young families looking forward to a family nest of their own by buying a home. They will no longer have access to the housing market on the same terms as the previous generation. The QFREB estimates that in 2017 alone, 5,000 to 6,000 Québec households will abandon hope of buying a home solely due to the introduction of the mortgage rate stress test rule. REDUCED COMPETITION IN THE MORTGAGE MARKET The new measures that apply to low loan-to-value ratio mortgages (where borrowers pay a down payment of 20 per cent or more) will have a dampening effect on competition in the Canadian mortgage market. Non-bank mortgage lenders (or mortgage finance companies) make massive use of mortgage insurance in the form of portfolio insurance to securitize their mortgages under the NHA MBS program. Since November 30, several types of loans are no longer eligible for this portfolio insurance. The new rules will deprive mortgage finance companies of a key source of funds that allows them to compete with the major banks. However, according to a recent study by the Bank of Canada 2, even though mortgages provided by mortgage finance companies are a priori at a higher risk, the mortgage arrears rates of these companies are twice as low as traditional lenders (chartered banks and credit unions). Accordingly, it is incorrect to claim that their activities increase the risk to the Canadian financial system. INCREASING MORTGAGE RATES In addition, under a measure introduced by the OSFI and in effect since January 1, 2017, federal financial institutions must retain a greater proportion of capital for insured mortgages. Though we applaud this measure, it will also create upward pressure on rates while decreasing both profitability and the funds available for mortgage financing. 2 Financial System Review, Bank of Canada, December 2016, page 45
6 On October 21, 2016, the federal government also launched a consultation process on risk sharing between lenders and insurers for government-backed insured mortgages. It is considering obligating mortgage lenders to bear a portion of the losses on insured mortgages that default. This is again, in our opinion, an excellent initiative. However, if financial institutions are required to bear more risk, it will inevitably lead to increases in mortgage rates 3. In consequence, these three factors will lead to higher mortgage rates in the coming months, which in turn, will and is already acting as a damper on housing demand and price growth in the Canadian real estate market. INCREASE IN MORTGAGE INSURANCE PREMIUMS According to a new rule imposed by the OSFI that took effect on January 1, 2017, mortgage insurers must retain a higher level of capital, particularly for loans in higher-risk markets. This measure has already led to the announcement by the CMHC of higher mortgage insurance premiums that will take effect on March 17. Again, this increase will hit possible first-time home buyers the hardest since it increases the cost of financing for all borrowers who do not have a minimum 20 per cent down payment. Furthermore, this is the third increase in premiums in four years. SOLUTION STRATEGY: ENHANCEMENT OF THE HOME BUYERS PLAN To counter the effect of these mortgage-tightening measures on first-time home buyers, the QFREB supports the Canadian Real Estate Association (CREA), which represents over 115,000 realtors across Canada, in its efforts to enhance and improve the Home Buyers Plan (HBP). CREA recommends indexing the HBP to inflation so that its purchasing power does not continue to erode year after year. With an immediate enhancement of the HBP and a broadening of its scope, first-time home buyers will have less difficulty in coming up with an initial down payment, which would improve access to home ownership. You may recall that one of the electoral promises of the Liberal Party of Canada during the last campaign was to enhance the HBP. The government envisioned that Canadians undergoing significant life changes such as a job relocation, the death of a spouse, a marital breakdown or a decision to accommodate an elderly family member could draw on their RRSPs to buy a house without paying taxes. 3 A preliminary analysis conducted by the federal government suggests that the average increase in lender costs could be between 20 and 30 basis points.
7 CONCLUSION The impact of these mortgage-tightening measures will be felt throughout the province. Our economists project a 7 per cent slowdown in residential sales this year in Québec. There is a high risk, in our view, that the slowdown of the real estate market will be much stronger than what the Government anticipates, which would be very harmful to the economy. Rather than penalize first-time home buyers by constantly tightening mortgage rules, we believe that the government should also consider measures applicable to other types of consumer loans 4. The government aim of reducing the indebtedness of Canadian households is commendable. However, in our opinion, it must be accomplished through more comprehensive and sustainable measures, for example, by reviewing debt service ratios. With a view to maintaining a vibrant and healthy real estate market, please be assured that the Québec Federation of Real Estate Boards will readily agree to participate in consultations on the challenges of home ownership in the Canadian real estate market. We would also like to be consulted if the government considers other measures that would affect the housing market. 4 According to Statistics Canada, 30 per cent of the debt load of Canadians is linked to consumer loans (personal loans, auto loans, student loans, personal lines of credit, etc.).