Experts in the real estate industry say CMHC’s new, strict lending measures will trigger a surge in home purchase volume as potential home buyers rush to the mortgage market before July 1, when these policies take effect.
“Whenever there has been a deadline given for a major mortgage rule change,” Ron Butler, mortgage broker at Butler Mortgage, told Yahoo Finance Canada “there has been a distinctly accelerated pace of transactions prior to that change.” Butler described that this has been the case with any rule change that was not immediately invoked.
CMHC’s new measures, which include at least one applicant having a minimum credit score of 680 and a maximum debt service ratio of 44 and gross debt service ratio of 35, mean that prospective home buyers who don’t meet the new requirements have a tight deadline to meet.
It’s an issue that resonates with Jivan Sanghera, mortgage broker at Circle Mortgage Group. Sanghera described a family he has been working with who would have qualified for a $900,000 mortgage before the measures, would now qualify for $790,000, losing about 12 per cent of their purchasing power.
“These are people that have been saving over time, don’t have an income interruption and don’t perceive an interruption in their income. The credit scores are already fine,” Sanghera explained, “They’re being told for no reason other than underwriting rules that they no longer qualify for what they want.”
Sanghera said that with the economy slowly emerging from the COVID-19 crisis and Canadians are beginning to transact again, this is the wrong time for CMHC to introduce these stricter measures. The short-term scramble to be approved for a mortgage and purchase a home in a tightening window will boost the sales-to-listing ratios in a major housing market like the Greater Toronto Area.
“Now you are going to put further short-term pressure on prices,” Sanghera explained, “What is being solved here other than reducing risk for the bank? That’s the only thing I keep seeing this come back to.”
In a press release, CMHC president and CEO Evan Siddall explained that the measures were to “protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
Sanghera responded. “Of course, we do not want people to be overextended. In the same regard, at what point is CMHC intervening in a free market?” he asked.
Ben Rabidoux, president of North Cove Advisors, doesn’t agree with the ‘free market’ characterization of the mortgage market. “The entire mortgage lobby has a direct federal guarantee and multiple layers of direct federal guarantees that subsidized them, so cry me a friggin’ river,” Rabidoux told Yahoo Finance Canada.
“The government from time to time has the right and should be re-evaluating their position given the changing risk landscape. That’s how that’s supposed to work. It’s not a free market.”
CMHC also said in their statement that the aim of some of these measures would help manage the risk to their insurance business.
Butler noted that the soaring household debt levels in Canada, much of it driven by mortgage debt, are a factor in the CMHC decision.
“At the end of the day, an insurance company has to wisely consider how to operate their business.”
From CMHC to the private sector
As CMHC tightened its measures, it left many who analyze the industry wondering what the next step for private companies will be. Around the same time CMHC elected to tighten its measures, HSBC introduced a record-low 1.99 per cent rate on a five-year fixed mortgage. It was the first bank to break the two per cent barrier on the five-year fixed, according to Rate Spy.
“At this point, the big question is whether the private insurance will follow suit,” said Rabidoux.
On Monday, Genworth MI Canada Inc. announced that it has no plans to follow CMHC’s lead on tightening mortgage requirements. The standards to debt service ratio limits, minimum credit score and down payments are expected to stay the same. Canada Guaranty Mortgage Insurance Company has yet to comment on whether or not it will follow CMHC’s mandate.
“I think the biggest change is the debt service ratio. That’s the one that has the potential to be quite disruptive,” said Rabidoux, adding that there could be a potential workaround in the private space.