CMHC made an announcement this week, restricting the amount of guarantees they will give each month. Essentially, this means the number of mortgages that will be approved with less than 20% down will be capped on a monthly basis - a move that could take some wind out of the Canadian real estate market.
At the beginning of the year, CMHC was allowed to guarantee $85 billion in mortgages for the year - as of last month they'd already guaranteed $66 billion, and are now forced to set monthly restrictions to stay under the annual cap set by the federal government. Essentially this only effects first time buyers, as they are typically the ones that require insurance from CMHC, but first time buyers can create a ripple effect through all levels of the market.
Analysts say the cap will make it harder and more expensive for banks to obtain funds to lend to their customers, which would likely be passed on by way of a bump in mortgage rates. With mortgage rates already on the rise, due to surging bond yields, the timing is a little curious. However, in last month’s monetary policy report, the Bank of Canada cited the recent developments in the housing market as the top made-in-Canada risk to the economy (and we did see a surge in the real estate market here in Edmonton in July). From the report: “This renewed momentum would produce a temporary boost to economic activity and inflation, but more importantly, it would exacerbate existing imbalances and therefore increase the probability of a more severe correction later on."
Here are thoughts from various industry leaders on the topic:
- CIBC Chief Economist Avery Shenfeld: “The combination of steps the government has taken in the last year, coupled with the beginnings of a sell-off in the bond market... will put a bit of upward pressure on mortgage rates. Overall, the days of very cheap mortgages are going to be replaced by cheap mortgages.”
- TD economist Diana Petramala, estimated rates could rise anywhere from 20 to 65 basis points (historically, this is a minor increase). “Affordability will still remain in the housing market, we are starting to see the impact of the changes wearing off... prices in most markets are now rising faster than income. So it makes sense that the federal government, CMHC, may want to limit some of the risk-taking in the housing market.”
- National Bank analyst Peter Routledge: “The government is attempting to tighten credit conditions for home loans, for example the changes to CMHC’s underwriting standards last year, and this is the latest iteration of that effort. The four largest mortgage underwriters, (RBC, TD, CIBC and ScotiaBank) had made good use of the NHA MBS program and I expect that their funding strategies will change as a consequence. Given the differentials in funding costs via NHA MBS or unsecured long-term funding, I could see [an additional] 20 to 65 basis points in the cost of funding mortgages for the larger banks. All else equal, we could see mortgage rates start to move up in unison.”
- BMO chief economist Douglas Porter: “I think it’s fair to say that Ottawa is incredibly, intensely focused on the housing market and the last thing they want to see is the market flare higher again. They are doing whatever they can to guide it to a soft landing.”
- Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals, said he doesn’t see the CMHC announcement so much as an attempt to slow the market, as “part of the policy of the current government to limit taxpayer exposure. It is just another policy initiative, on top of four mortgage lending rule changes over the last five years... to restrict or curtail its exposure – I would even say involvement – in the overall mortgage market.
So what does all this mean for us?
Gord McCallum, over at First Foundation summed it up pretty well:
- Higher interest rates.
- Possibly less competition in the mortgage marketplace.
- Possibly more differentiation in rates between monoline lenders (only available through brokers) and banks. Costs for monolines might be relatively lower as a result of this. To be determined.
Will this impact the housing market in Edmonton? Certainly. The problem is, the market in Edmonton is very difficult to predict at this time of the year. Just look at the sales chart below and you can see January to May is very easy to predict, but the variance in sales each month from June to October is quite large.
I certainly expect to see a large decrease in sales in August compared to July (which was well above average). Although low mortgage rates certainly had a part in the near record July sales, they didn't appear to be a driving force. Buyers may have to move away from their preferred lender in order to get an approval - we'll just have to wait and see.