Inflation notches higher in January
Ottawa— The Canadian Press
A one-month pop in gasoline prices propelled Canada's annual inflation rate up two notches to 2.5 per cent in January, reversing a recent trend toward moderating consumer price increases.
Pump prices climbed 2.8 per cent last month, partly due to political instability in the Middle East, contributing to upward pressure on both the monthly and annual indexes tracked by the Statistics Canada.
The agency said consumer prices overall were half a point higher in January on a seasonally adjusted basis than they were in December, almost totally reversing last month's sharp 0.6-per-cent decline — both movements coming mostly from fluctuations in the price of gasoline.
As well, underlying core inflation — which excludes volatile items such as some fresh food and gas — rose to 2.1 per cent, one tick higher than the Bank of Canada's target.
Analysts had expected the monthly and annual measures to rise, but not as sharply as occurred.
Besides the climb in gas prices during January, economists were expecting the one-point increase in the Quebec sales tax that went into effect on Jan. 1 to provide a small boost.
Another key contributor to inflation remains food, which in January cost 4.2 per cent more than a year ago, although food prices continue to moderate.
Excluding those two items, inflation would be a tepid 1.6 per cent, the agency said.
That is likely to give the Bank of Canada comfort that inflation remains well in control despite the persistent above-target readings. The central bank forecasts inflation to fall to about 1.5 per cent by mid-year.
Overall, seven of the eight major price components that Statistics Canada tracks registered increases in January, the lone exception being recreation, education and reading.
Transportation rose 3.7 per cent on an annual basis, shelter costs increased by 2.1 per cent, household operations were higher as were clothing and footwear, and alcoholic beverages and tobacco. The rising cost of food was punctuated by a 9.9-per-cent annual increase in bread, 8.3 per cent in fresh vegetables and a 6.5-per-cent hike in meat prices.
Not all items cost more in January, however. Furniture cost 3.6 per cent less last month than a year ago and video equipment dropped 9.7 per cent. Mortgage interest costs and travel tours were also slightly less expensive.
Most of the inflation occurred in Ontario and Quebec, at about half a point each, with the other provinces seeing relatively flat pricing.
Regionally, annual inflation was highest New Brunswick at 3.2 per cent last month and lowest in British Columbia, at 1.7 per cent.
Richard's Thoughts:Richard’s comments: I would prefer to believe this news then a housing Bubble. I agree with Canada being aligned with the US market and with the recent positive US economic news , I hope our housing market remains strong and All Home owners in KW Region take advantage of the current low Interest Rates.
OTTAWA — Canada Mortgage and Housing Corp. is predicting the Canadian housing market will remain fairly stable this year and next, with little change from 2011 in prices, new home construction and sales of existing homes.
The national housing agency said Monday in its first-quarter 2012 report that the foreseen stability stems from an economy that appears set to expand at only a moderate pace over the next two years. The Bank of Canada's key overnight rate — which affects mortgages tied to prime rates — will likely remain low until mid-2013, which should also act to keep activity on an even keel.
“With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011,” CMHC deputy economist Mathieu Laberge said in a statement.
Low mortgage rates and high demand have driven housing prices sharply higher in large urban centres such as Toronto and Vancouver, leading many experts to warn that a housing bubble could burst when rates finally do rise.
Despite those warnings and alarms from top government officials that Canadians are taking on too much debt overall, the housing market has seen little change over the past few years, with price growth slowing but not retreating in most areas.
The CMHC says it expects the average house price in Canada to hit $368,900 for 2012, with a projected range between $330,000 and $410,000, according to data from the Canadian Real Estate Association's MLS service.
For 2013, that number rises to $379,000, with a range between $335,000 and $430,000.
“The moderate increases in the average MLS price are consistent with the balanced market conditions that occurred in 2011, and that are expected to continue in 2012 and 2013,” CMHC said.
Housing starts are expected to be around 190,000 units this year and 193,800 units in 2013, while existing home sales are expected at about 457,300 units in 2012 and moving a little higher to 468,200 units in 2013.
The CMHC predicted that housing starts will be in the range of 164,000 to 212,700 units in 2012, and between 168,900 to 219,300 units in 2013. Existing home sales are expected in a range from 406,000 to 504,500 units in 2012, rising to 417,600 to 517,400 units in 2013.
Western Canada is expected to see strong growth in new housing starts, with Alberta leading the way with a 13.2 per cent increase. However, the agency said it expects housing starts in Saskatchewan to contract by about 2.7 per cent in 2013.
In Eastern Canada, all provinces are expected to see a contraction in housing starts for 2012, with “modest growth” returning to Quebec and Ontario in 2013.
The agency noted that the fate of an economic recovery in the United States, Canada's largest single trading partner, could have an immediate affect on Canada's housing industry —
“Some upsides include the potential that the U.S. could recover more quickly than anticipated, which would be positive for U.S. employment and economic growth,” CMHC said.
“In turn, this could boost employment growth in Canada and thus lead to a stronger than expected housing market.”
Conversely, if the U.S. recovery hits a snag and emerging economies see their growth slow while Europe suffers a slowdown, that could lead to slower employment growth in Canada and place a chilling effect on the demand for housing.
The Canadian Press
http://www.moneyville.ca/article/1130438--cmhc-sees-steady-housing-market-ahead
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Labour Shortage Becoming 'Desperate'
barrie mckennaOTTAWA— From Wednesday's Globe and MailPublishedTuesday, Feb. 07, 2012 10:00PM ESTLast updatedWednesday, Feb. 08, 2012 8:53AM EST
An increasingly “desperate” labour shortage is the main obstacle keeping companies from becoming more competitive.
An aging work force and growing demand for specialized skills means that hundreds of thousands of jobs are going begging despite stubbornly high unemployment, the Canadian Chamber of Commerce concludes in a report being released Wednesday.
The expected shortfall over the next decade or so includes 163,000 construction jobs, 130,000 oil workers, 60,000 nurses, 37,000 truckers, 22,000 hotel workers and 10,000 skilled steel tradespeople.
“Canada is developing a desperate labour shortage and resolving it is key to the continued success of Canadian businesses and the economy,” according to the report, Top 10 Barriers to Competitiveness.
The chamber said businesses must work closely with the federal and provincial governments to tap “underutilized” potential workers, including older workers, youth, natives, the disabled and new immigrants.
“We have to have a real sense of urgency. We’re trying to sound an alarm,” Perrin Beatty, chief executive of the chamber, said in an interview.
Most Canadians are “blissfully unaware” that their future prosperity is being put at risk by emerging economic challenges, from inside and outside the country, Mr. Beatty argued.
He pointed out that Prime Minister Stephen Harper’s visit to China this week is a powerful reminder that faster-moving trade rivals are rapidly moving up the economic “value chain.” He said Canada must “up its game” to keep pace.
“A lot of things we take for granted are at risk,” Mr. Beatty said.
The labour shortage is the most severe of 10 barriers facing businesses, which include discriminatory employment-insurance benefits across the country, a complex tax system that is laden with exemptions and too dependent on income and corporate taxes, lingering barriers to trade within Canada, and vague and overly restrictive foreign-investment rules.
A key challenge is to help workers laid off from shrinking industries, such as manufacturing, find work in fast-growing sectors.
That’s the reason the biotech industry is launching an online skills-transfer tool this week designed to help factory workers identify expertise that could be useful to new employers. Many traditional manufacturing skills are desperately needed in biotech, including those of equipment installers and operators and monitoring and control technicians, according to BioTalent Canada, an Ottawa-based non-profit group that developed the Web resource.
“Unemployed workers simply do not know this,” said Rob Henderson, executive director of BioTalent Canada.
Immigrants are another vast pool of potential workers. They make up a fifth of the labour force and all of its recent growth. But language barriers, mismatches of skills and problems converting foreign credentials is forcing too many of them into low-paying unskilled work or unemployment, concludes a report issued this week by Toronto-Dominion Bank.
Raising the employment rate for immigrants to the same level as native-born Canadians would mean 370,000 more people working, according to TD. And if immigrants were paid the same as non-immigrants, the boost to the economy would equal $30-billion, or 2 per cent of the gross domestic product.
“Canada would gain a major competitive advantage if this country were recognized around the world as one where all migrants are successful in being able to practise their own trade and raise their standard of living,” the TD said.
Solving the dilemma is “integral to the long-term prosperity of Canada’s economy,” the bank said. Better targeting of immigrants with the skills Canada needs, along with improved language training and better recognition of foreign credentials would help to close the gap, according to TD.
TD, RBC End 2.99% Mortgage Deal Early
Eric Lam Feb 8, 2012 – 10:02 AM ET | Last Updated: Feb 8, 2012 10:05 AM ET
After briefly offering record-low rates of less than 3% on some of its mortgages in response to its rivals, Canada’s two biggest banks have pulled back their offers prematurely.
Toronto-Dominion Bank, Canada’s second-largest bank, raised its special four-year closed fixed rate mortgage 40 basis points to 3.39%, effective Wednesday, while also introducing a special five-year closed fixed rate mortgage at 4.04%.
The bank also hiked its five-year closed mortgage 10 basis points to 5.24%.
TD had said it would offer the special rates until Feb. 29.
The moves put TD back in line with Royal Bank of Canada, which made the same rate decisions on Monday, coming into effect Wednesday.
RBC had also initially planned to keep its special rates available until Feb. 29
The only difference is RBC already had the special five-year closed fixed rate mortgage product, which it increased 10 basis points to 4.04%.
RBC had first cut its rate to 2.99% in January in response to a similar cut from BMO.
Matt Gierasimczuk, a spokesman with RBC, said the bank had to end its special prematurely because of rising funding costs.
“Our long-term funding costs have gone up considerably due to global economic concerns and, while we have held off in passing on these rate changes to our clients, it is now necessary for us to increase this mortgage rate,” he said in an interview with Bloomberg News on Monday.
With household debt-to-income ratios at at historic highs and still on the rise, the Bank of Canada has repeatedly voiced its concerns over the past year that Canadians are living beyond their means.
“We have expressed on numerous occasions our concerns about rising household indebtedness,” senior deputy governor Tiff Macklem said in a question-and-answer session following a speech in Toronto Tuesday. “The simple fact is that consumers are consuming more than they’re earning.”
http://business.financialpost.com/2012/02/08/td-rbc-end-2-99-mortgage-deals-early/
Ottawa Leans on Banks to Tighten Lending
Jeremy Torobin AND Grant Robertson
OTTAWA AND TORONTO— From Friday's Globe and Mail
Published Thursday, Feb. 02, 2012 1:13PM EST
Last updated Friday, Feb. 03, 2012 7:15PM EST
Ottawa is becoming increasingly uncomfortable with record-low mortgage rates being offered by some Canadian banks and the ease with which some institutions are advancing lines of credit.
Finance Department officials raised concerns with bankers in recent weeks about historically low mortgage rates as well as lending standards, industry sources said Thursday. After warning for several months about the debt levels of Canadian households, government officials were upset that banks continued to reduce rates and make a bigger push on home loans.
More related to this story
For example, Bank of Montreal (BMO-T58.47-0.28-0.48%) last month introduced a 2.99-per-cent five-year variable rate, prompting rival banks to lower rates.
The government has also raised issue with lighter standards on some home-equity lines of credit, or HELOCs, at some banks. Credit lines offered by Toronto-Dominion Bank, (TD-T78.980.150.19%) for example, allowed existing customers to take out additional credit against their homes with lighter approval standards. That provoked concern at Finance, sources said. TD would not comment Thursday.
Documents from the Office of the Superintendent of Financial Institutions, made public by Bloomberg News Monday, show the regulator began to worry in August some banks are relaxing their standards on HELOCs and mortgages to attract business. In the documents, OSFI flagged mortgages issued to borrowers who haven’t had to prove their income, which it said bear a resemblance to “non-prime loans in the U.S. retail lending market.”
On a conference call from Tel Aviv Thursday, Finance Minister Jim Flaherty told reporters he shares those concerns, while suggesting the issue is not widespread and is under control.
“OSFI’s concern arises out of some work that OSFI has done as part of the of the ordinary course of its business to look at some of the loans being made by financial institutions,” Mr. Flaherty said. “I was informed of what their assessment showed with respect to a few financial institutions, which is a matter of concern that is being corrected.”
Canadian Imperial Bank of Commerce (CM-T76.400.050.07%) stopped some forms of mortgage lending this week “in an effort to mitigate risks and meet changing regulatory requirements,” the bank said in a company memo. CIBC told brokers it is no longer accepting so-called “stated income” applications, where the lender does not verify the borrower’s income through pay stubs or tax returns, usually because they have significant other assets in their portfolio and make larger down payments. Such lending, often used by new immigrants looking to buy homes, is among the type of loans OSFI is concerned about.
OSFI, headed by Julie Dickson, also is looking at stepping up its scrutiny of the housing sector, concerned about speculators in Toronto and Vancouver, in addition to riskier lending practices and how those could hurt banks in the event of another downturn.
Gord Nixon, chief executive officer of Royal Bank of Canada, (RY-T53.470.140.26%) rejected the notion that some banks may be engaging in subprime lending. “The impression that banks are being more aggressive and lowering their standards is just not the case,” Mr. Nixon said in an interview.
“Lending standards are higher today than they were a number of years ago. It’s a very competitive market and lending standards remain very appropriate, and if anything more conservative.”
Similarly, a spokesman for Bank of Montreal said in a statement that the bank has maintained its standards. “We take a prudent and disciplined approach to adjudication, and apply those standards consistently throughout the cycle, which is reflected in the performance of our mortgage portfolio,” BMO said.
Nonetheless, OSFI has told the banks it will now monitor on a quarterly basis what steps lenders are taking to avoid problems in the HELOC market. Leonie Roux, a spokeswoman for OSFI, said the regulator is mostly focused on ensuring that institutions are solvent rather than micromanaging what sort of documentation they demand from borrowers before issuing a loan or line of credit.
At the same time, she said, “when we identify concerns at a financial institution, we work with the institution to see that any deficiencies are addressed.”
The Canadian Bankers Association, an industry lobby group, has no set standards or guidelines for loan applications for its members to follow. Spokeswoman Maura Drew-Lytle noted that mortgages in arrears – meaning a payment has not been made for three or more months – are an “incredibly low” 0.38 per cent of banks’ total outstanding home loans, demonstrating that banks are “prudent lenders.”
Vancouver mortgage planner Robert McLister, editor of the Canadian Mortgage Trends blog, said any relaxing of lending standards is likely in the past.
“There was, I would say, perhaps somewhat looser lending on HELOCs in 2011 – particularly in maybe the first two thirds of the year – but things have noticeably tightened up,” he said. “And I’m speaking as somebody that does a lot of line-of-credit deals and sees what the lenders approve.”
Richard's Thoughts:
Hopefully Canada can ride the unexpected good news on the employment front in the US and start giving some confidence in Business by creating more job opportunities. Kitchener- Waterloo is below the National Average, however, we all have to be diligent and protect what we have. Our Mortgage Free Sooner Plan should be an option that you keep in mind.
Jobless rate hits 9-month high
tavia grant
Globe and Mail Update
Published Friday, Feb. 03, 2012 7:07AM EST
Last updated Friday, Feb. 03, 2012 10:00AM EST
The Canadian economy added just 2,300 jobs last month and the unemployment rate hit a nine-month high, more signs the country’s labour market remains tepid.
The country’s jobless rate rose a notch to 7.6 per cent in January, Statistics Canada said Friday. Economists had forecast 22,000 new jobs in the month, with the unemployment rate staying at 7.5 per cent.
Alex Dagorio, left, looks at the job board during the National Job Fair and Training Expo at the Metro Toronto Convention Centre. Manufacturing employment tumbled to another record low, while in the finance and real estate industry, three-month average job losses are the steepest on record.
Canada has added 129,000 jobs over the past year, however the bulk of them were in the first six months of that period. Since last summer, job creation has been sluggish and the unemployment rate has ticked higher, reflecting cautiousness of employers in an uncertain economic climate.
The report “reinforces the point that Canada’s job creation engine is cooling markedly,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns in a note. “With domestic drivers now gearing down, the job market needs the U.S. economy to gather some serious momentum.”
The U.S. jobs market – at last – is looking up. American employers created 243,000 jobs last month – outstripping expectations and sending the unemployment rate to a near three-year low of 8.3 per cent, the Labour Department said Friday.
In Canada, part-time positions rose by 5,900 while full-time jobs fell by 3,600. Both the private sector and the public sector added to head count, while self-employment fell.
By sector, the financial, professional and technical services shed 44,800 jobs. The finance, insurance and real estate sector continued its employment declines.
Employment in the finance, insurance and real estate sector tumbled for the fifth straight month, shedding 23,000 jobs in January. Employment in this industry has fallen 4.6 per cent from last year.
Employment grew in educational services, along with information, culture and recreation.
Once again, employment rose among women aged 55 and over. This group has seen the biggest percentage gains in job growth of any demographic group over the past year.
Youth are having a tougher time – employment among those aged 15 to 24 fell for the fourth month in a row. Youth employment is 31,000 below its level of January, 2011, and the jobless rate jumped to 14.5 per cent last month from 14.1 per cent.
By province, employment in Quebec edged up, reversing a steep tumble in the fourth quarter of last year. Employment fell in Prince Edward Island and was little changed elsewhere.
Job creation will remain lacklustre in the coming months, said Derek Burleton, deputy chief economist at Toronto-Dominion Bank. He sees average gains of roughly 10,000 a month, and the jobless rate stuck at current levels.
“With budget season fast approaching, government hiring is almost certain to gear down significantly while ongoing economic uncertainty keeps hiring in the business community in check,” he said.
http://www.theglobeandmail.com/report-on-business/economy/jobs/jobless-rate-rises-to-76-in-january/article2325201/
Richard’s Thoughts:
Here are some possible rules that may affect qualifying as a Self Employed applicant and purchasing condominiums.
More mortgage rules planned if housing market gets too hot
Garry Marr Jan 23, 2012 – 12:23 PM ET
A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.
Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.
“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”
Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.
“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.
” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”
Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.
“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.
He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.
The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.
“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”
A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.
“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”
The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.
The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.
Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.
"The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”
gmarr@nationalpost.com
Richard's thoughts:
Interesting article and I can certainly agree that you may see some changes to CMHC’s underwriting in order to help prevent this from possibly happening. I would recommend to keep the 5% downpayment, however, restrict it to First Time Buyers only and Cap the home price or perhaps tier the amount of downpayment based on Home price over a certain amount. I would also recommend a change in the amount of down-payment as a Non-First Time Buyer to 10%.
For example a First Time purchaser in the Kitchener Waterloo region may have a Cap of $ 300,000 and an additional 5% down for the remainder. On a $400,000 purchase a client would need $15,000 for the first $ 300,000 and 10% for the rest for a total of $ 25,000 which represents a 6.25% as a downpayment.
I do believe changes will be forth coming and I would suggest that if a consumer wanted to take advantage of the current rules, that they may want to start the process sooner than later.
Connect the housing bubble dots: There could be trouble on CMHC’s horizon
Ted Rechtshaffen | Columnist profile | E-mail
Globe and Mail Update
Published Monday, Jan. 23, 2012 6:00AM EST
Last updated Monday, Jan. 23, 2012 8:33AM EST
A few months ago I heard leading Canadian investor Eric Sprott speak, and he said a very basic thing that struck a chord. He said that you should not be afraid to connect the dots. The dots are usually in front of you, but people don’t often look beyond the single dot.
Today I am going to show six dots that we can all see. When we connect them, the conclusion is that the Canadian Mortgage and Housing Corp. (CMHC) has a realistic chance of putting the Canadian taxpayer at risk – unless meaningful changes are made.
The key piece of background is that right now, a young couple can put down $20,000 to buy a $400,000 house, or five per cent of the purchase price. Their mortgage will be insured by CMHC (the Canadian government, also known as you and I) in exchange for a fee paid by the young couple.
If that $400,000 house drops in value by 20 per cent, for example, which has happened before in Canada, it will be worth $320,000. But the couple will owe $380,000. Then the odds of them walking away from their house or defaulting on their mortgage become meaningful. Given that this young couple might be in the same position as 50,000 other young couples (about 3 per cent of the Canadian population) at roughly the same time, the odds of a surge in mortgage defaults is very real in Canada.
Here are the dots or facts that we can all see:
Dot #1: “The greatest risk to the domestic economy is household debt,” Bank of Canada Governor Mark Carney said in an interview with the CBC last week, again sounding the alarm bell on excess borrowing.
Dot #2: The ratio of credit market debt to personal disposable income rose to a record high of 150.8 per cent in the third quarter of 2011, Statistics Canada said last week, the third-straight quarter the figure has gone up.
Dot #3: Last week, Bank of Montreal offered a five-year mortgage rate of 2.99 per cent. The lowest rate offered in history. Yes, this rate is available to those interested in putting down 5 per cent.
Dot #4: Fannie Mae and Freddie Mac, two U.S. organizations started in 1968 as a government sponsored enterprise (although they became privately owned and operated by shareholders) – have a mandate to help Americans to become homeowners by increasing liquidity for housing lending, and where appropriate, taking on risk. These two organizations were bailed out by the U.S. government in 2008 after the housing market deflated and it is estimated that their bailout will eventually cost taxpayers as much as $124-billion (U.S.) through 2014. When the housing bubble burst in the U.S., the value of many houses fell by 50 per cent.
Dot #5: In November, the Economist magazine said that Canada is among nine countries in the world where house prices are overvalued by 25 per cent or more. It went on to say that Canada is one of only three countries where “housing looks more overvalued than it was in America at the peak of its bubble.”
Dot #6: CMHC is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC backed loans of $541-billion (Canadian) as of Sept. 30, 2011. At that time, the total equity of CMHC was $11.5-billion. This is 2.1 per cent in equity against its overall loan exposure. To put the $541-billion in perspective: If we go back to those imaginary 50,000 couples that bought a $400,000 house and put down $20,000, that represents $19-billion of mortgages.
Back in 2007, Fannie Mae backed up $2.7-trillion (U.S.) of mortgage-backed securities with $40-billion of capital, or 1.5-per-cent equity against its overall exposure. At that time Fannie Mae stock was trading at $50 a share. Today it is 19 cents.
Just because these dots or facts are out there doesn’t mean that housing prices in Canada will fall 25 per cent or that CMHC will face any major financial problems in the years ahead. However, by connecting the dots, we can see a very plausible scenario that already unfolded with Fannie Mae and Freddie Mac that cost U.S. taxpayers an estimated $124-billion. If we had a similar scenario – and CMHC is now roughly one-tenth the size of the combined Fannie Mae and Freddie Mac – it is plausible that in a major real estate downturn, Canadian taxpayers would be on the hook for several billion dollars.
The biggest risk is likely with mortgage holders who only put 5 per cent to 10 per cent of equity down when buying a property. The reason I say this is that if house prices drop by over 10 per cent, everyone in this group will have negative equity in their homes. According to CMHC, 9 per cent of their loan book (or $49-billion) is connected to mortgages with under 10-per-cent equity based on current home prices. Remember all of CMHCs equity value is $11.5-billion (Canadian). Another 18 per cent of their loans are connected to mortgages with between 10-per-cent and 20-per-cent equity based on current home prices. This is another $108-billion of loans.
What happens if Canadian houses hit their ‘proper’ value, according to the Economist magazine, and decline by 25 per cent of their value? Every one of the $157-billion of mortgages noted above will be guaranteed by the Canadian taxpayer, and every one of those mortgages will be on homes with negative equity value.
When we connect the dots and look at the real risk, the time has come for the federal government to do the prudent thing and raise the minimum equity payment from 5 per cent to 10 per cent, and at least minimize the hit from the riskiest segment of mortgages insured by CMHC.
We can’t say we didn’t know, when the dots were right in front of us.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.