Increasing the minimum downpayment would negatively impact the economy

Sunday, June 28, 2020   /   by Sergey Korostensky

Increasing the minimum downpayment would negatively impact the economy

Evan Siddall, president and CEO of the Canada Mortgage and Housing Corporation (CMHC), has shocked real-estate watchers with at least two comments regarding Canadian housing markets.

Speaking to the House of Commons Finance Committee on May 19, Siddall said CMHC is forecasting a decline in average house prices of nine to 18 percent over the next 12 months.

He also said a 10 percent minimum downpayment, rather than the current minimum of five percent,would offer first-time home buyers a cushion against possible losses.

The comments caught industry insiders off guard, some calling it irresponsible.

Phil Soper, president and CEO of Royal LePage, uses another word.

“A lot of people were puzzled by CMHC’s statement because, if you recall, they delayed their forecast at the end of the first quarter, saying ‘we don’t have enough data, so we’re not forecasting.’ Royal LePage brought our forecast out at the end of the first quarter and, at that time, Siddall said prices won’t recover until 2022,” says Soper. “It was a throwaway comment, there was no data there, was no supporting argument, from effectively the head of Canada’s federal government housing agency, so it’s not some random citizen making this statement.

“Now we fast forward to last week, again a quite aggressive statement for an agency that’s put in place to support peoples’ ability to buy homes. It’s clearly a view that people should own fewer homes; it’s the only outcome you could draw.”

The fear is homeowners would see the statements and scramble to sell their homes. A huge increase in listings would depress average prices, making Siddall’s comment a self-fulfilling prophecy and not just for housing.

“The challenge I have with his statements go well beyond housing,” says Soper. “If people took his statement at the headline level and saw the head of CMHC was calling for prices to be down almost 20 percent, they think it was really an odd statement. You have to go back to the eighties to have seen prices fall that much. If you dig into the details, there was modelling and it was an extreme case, not an expected case but still, throwing out that kind of number is a huge reset in the value of Canadian housing stock and that could act as a real drag on the recovery of the housing market.”

As Soper notes, CMHC does not set the minimum downpayment required to buy a home and receive insurance. That decision is made by the Department of Finance.

“To suggest publicly downpayments should double, while predicting huge price drops, could be seen as an effort to curb the recovery of the housing market, which is very odd given its source,” says Soper. “The challenge I have with this in broader economic terms is, I believe in the housing market and the consumer spending that’s driven from it, and there are many ancillary economic benefits that grow in housing spinoffs — you have gardening, home improvements, real estate and legal services, movers, painting — a home sales transaction triggers a whole raft of other consumer spending. If you look at the 2009 post great-recession recovery, it was housing that did the heavy lifting, and since 2015, real estate has been the single largest slice of the Canadian economy. If you look at the size of the energy sector and the real estate sector, it’s very close, but real estate is slightly larger and it has been since the value of oil dropped at the end of 2014.”

Of the two comments, Soper’s biggest concern is the potential of a 10 percent downpayment.

“The statement of price drops will have some impact, but there’s enough credible forecasters, including the Bank of Canada, including the major banks, including Royal LePage, that have counter opinions that I think his statements of close to a 20 percent price decrease may be dismissed as extreme,” he says. “Doubling the downpayment required for homeownership would have an immediate negative impact on economic recovery.”

It’s important for Canadians to know there are many other checks and balances in place to protect them from getting over-leveraged, says Soper.

“Firstly is the mortgage stress test. If you can’t prove that you can handle a mortgage that’s actually much larger than the one you’re going to buy at retail, you’re not going to get a mortgage,” he says. “Secondly, there’s the historically low interest rate and concerns about deflation, not inflation, for the medium term, call it the next two or three years. It’s very unlikely interest rates will be anything but historically low and finally it’s the lenders themselves who take great concern. They don’t just approve someone because they can, they approve someone they want to be able to make those payments and translate into a long-term bank customer. So you’ve got a series of measures in place to manage risk without doubling the downpayment required. Structurally, and particularly at this stage, those measures seem to be the prudent way forward.”

And, again, Soper’s word for the comments.

“We have a proven engine of economic recovery and the head of the housing agency making public statements that could hamper overall economic recovery,” he says. “It flies in the face of the billions of dollars of support the federal government is pumping into the economy to trigger a recovery post-lockdown.

“It’s puzzling, it’s very puzzling and I think potentially damaging to the economy overall.”