Regulators should explore boosting minimum down payment on homes: CMHC

The head of Canada's federal housing agency says regulators should explore the possibility of raising the minimum down payment required on a home as a way of easing affordability and reducing risk to the financial system.

The head of Canada Mortgage and Housing Corp. (CMHC) has opened the door to the possibility of increasing the minimum down payment needed to buy a house, though a change is not currently on the table. Evan Siddall, president and CEO of Canada Mortgage and Housing Corp., says that although politicians are tempted to help first-time buyers, low down payments fuel demand and lead to higher housing costs. Siddall says that ends up hurting the first-time buyers that the government wanted to help.

Last year, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10 per cent. The Canadian government reduced the minimum down payment from 10 per cent to five per cent for first-time home buyers, as a measure to boost the economy. The move was applied to all home buyers in 1998.

“Politicians are tempted to help first-time homebuyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macro-economic vulnerabilities,” said Siddall, in the speech which was posted to the Crown corporation’s web site.

“The conditions that we now observe in Canada concern us. Increased household borrowing could be jeopardizing our economic future.”

Siddall said in a speech at the Bank of England's offices in London that increasing the minimum down payment even further could help offset the effects of rock-bottom interest rates, which have encouraged borrowers to take on excessive mortgage debt. He added that regulators should also explore the possibility of imposing a loan-to-income limit as Ireland, the U.K. and a few others have done. “Coupled with the personal exemption from capital gains taxes on the sale of principal residences and other programs, Canadians have very powerful incentives to own homes,” said Siddall. “At 69 per cent, our homeownership rate is among the highest in the world. While homeownership has been an effective vehicle of forced savings and retirement security, it may also constrain labour mobility.”

Ottawa moved in December, 2015 to increase the minimum down payment to 10 per cent on contributions on the portion of house prices above $500,000. The maximum value for buying a home backed by government insurance is now $1 million so the downpayment at that much house would work out to 7.5 per cent today. “I have yet to be convinced that people in our country need access to 19:1 leverage to buy homes. In fact, it may be a fool’s bargain with the extra demand simply feeding higher house prices: the benefits of the policy accruing to wealthier home sellers rather than to the young first-time homebuyers it purports to help,” said Siddall.

Phil Soper, chief executive of Royal LePage Real Estate Services, warned the government should be very careful about its next move in the housing market.

“The precipitous drop in Vancouver housing activity in recent weeks should remind policy makers at CMHC and elsewhere that market balance is delicate, and a heavy regulatory hand can cause much more harm than good,” he said. “The Vancouver real estate market was slowing naturally this summer as prices climbed and demand softened. Provincial and federal governments launched poorly coordinated aggressive moves aimed at slowing the market, which hammered consumer confidence, causing a mass of prospective homeowners to withdraw in fear. Existing property owners will suffer as a result.”

Siddall also raised the spectre of the government not backing 100 per cent of loans as it does now for CMHC mortgage insurance. It backs 90 per cent for private mortgage default insurance providers.

“Rather than offering a whole life policy, guaranteeing 100 per cent of the mortgage for the length of its life, should insurance end at a loan-to-value floor?” he said. Siddall also told the audience about CMHC’s plan to reduce the government’s risk by forcing private institutions into taking what is effectively a deductible on any bad loans.

“Currently, lenders benefit from a zero risk weighting on guaranteed mortgages. Requiring lenders to have more skin in the game will align interests, reduce moral hazard and allow the system to benefit from enhanced lender risk management,” he said.

Two alternatives are being considered. The first loss approach lenders are responsible for losses up to a fixed amount of the outstanding balance on the loan, with insurers taking on all losses in excess of this limit. Another model would see lenders incur a fixed percentage of the total loss on a loan under a proportionate loss model. The moves could raise mortgage rates on a five year fixed product from 10 to 40 basis points.

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