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Bridge Beat

May 26, 2020

Canada Mortgage and Housing Corp. (CMHC), Chief Executive, Paints Bleak Picture for Residential Housing in Canada

You may recall my previous blogs about Evan Siddall, CEO of CMHC who last year severely criticized efforts to modify the mortgage stress test in any way, predicting financial Armageddon if the strings were loosened and more buyers, particularly first time buyers, were allowed into the market.  Notwithstanding his pronouncements, the government recently enacted some minor changes for both insured and uninsured mortgages that would adjust the artificial mortgage rate to be used in the stress test.  Now, in the midst of the world's most severe and catastrophic financial and health crisis it has faced since the Spanish flu of 1918-1919, Mr. Siddall has made a number of pronouncements which can only exacerbate a very difficult situation for both residential borrowers and developers alike.

Mr. Siddall expressed serious concerns about Canadians increasing debt levels, which are dominated by mortgage debt, in comments he made on Tuesday, May 20, 2020, before the Commons Standing Committee on Finance.  Again, consistent with his views on tightening the noose around first time buyers, he suggested that the minimum 5% down payment required for CMHC insured mortgages be ratcheted up to 10%.  This would "offer more of a cushion against possible losses" than the current 5% minimum.  Mr. Siddall warned against the impending drop of housing prices and somehow felt making it more difficult for purchasers to buy homes, would help protect them and assist the market.

All that will do, in the view of the writer, will force first time homebuyers to buy cheaper homes, reducing housing activity from higher priced homes to lower priced homes, again forcing first time buyers out into the suburbs where prices are cheaper.  Alternatively, first time buyers may continue to wait to save more money to buy the home that they want, again reducing demand and which will accelerate price declines. 

A further impact will be less spending by first time buyers and other home purchasers which results in less consumption.  As a result, instead of stimulating the economy back into some consumer spending where there is relatively little during the COVID-19 crisis, this proposal would merely accelerate that process, deepening the recession that we are all in.

Finally, Mr. Siddall, consistent with his doomsday forecasts for the Canadian housing market, suggested that by September 2020, he expects mortgage arrears to affect 1 in 5 borrowers.  Moreover, he expects that housing prices will decline by 9-18% over the next 12 months and boost the gross debt to GDP ratio to 130% by the third quarter.  Any more good news Mr. Siddall for the real estate industry?

The reality is there  will be some price declines as a result of the COVID-19 pandemic. Whether they turn out to be as dramatic as Mr. Siddall predicts remains to be seen, but  having the CEO of CMHC  make dire predictions of price declines of close to 20% will certainly not help the marketplace on the one hand, and  proposing to ratchet up minimum deposits for CMHC insured mortgages on the other, will not assist the housing market  to recover.

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