Higher down payments needed to battle housing risks: CMHC CEO

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Canada may need to hike minimum down payments to ease housing affordability woes and curb the risks of low interest rates, the head of Canada Mortgage and Housing Corp. said on Friday.

In a speech to a private audience in London as part of a Bank of England panel on housing finance policy, CMHC's chief executive officer, Evan Siddall, said Ottawa may need to consider raising down-payment rules further to offset the effects of low interest rates and counterbalance provincial programs that fuel housing demand by helping first-time home buyers, he said. This month, Ontario said it would double the land-transfer tax exemption for first-time buyers to $4,000.

"Politicians are tempted to help first-time home buyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macroeconomic vulnerabilities," Mr. Siddall said in the speech, which was published on CMHC's website.

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While Mr. Siddall emphasized that the federal government had no new housing measures on the table, he said Canada might also explore implementing a loan-to-income cap that would determine the size of mortgage buyers can get based on their income.

Currently, Canadian regulations require borrowers' incomes to be tested against their ability to meet their debt payments as well as the prospect of rising interest rates. Mortgage insurance is limited to homes priced less than $1-million, but Canada, unlike other countries, does not have a specific cap on how much home buyers can borrow compared to their incomes.

Down payments as low as 5 per cent "may be a fool's bargain, with the extra demand simply feeding higher house prices," primarily benefiting wealthier homeowners rather than young first-time buyers, Mr. Siddall said.

Canada's housing market is adjusting to several rounds of rule-tightening over the past year. Last month, Finance Minister Bill Morneau announced tougher income stress testing for insured mortgages.

A second change, limits on how lenders use government-backed portfolio insurance for pools of high-down-payment loans, was necessary to remove what Mr. Siddall called "artificial support" from the mortgage-lending industry.

The Office of the Superintendent of Financial Institutions is expected to introduce stricter capital requirements early next year that may cause mortgage insurers to hike premiums. Several banks have already started raising their mortgage rates in response to new rules and to rising government bond yields.

Policy-makers should hold off on any more changes to housing-market regulations until they gauge the effects of the most recent ones, and should turn their focus to building more rental housing, said Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal. "I think we should rest," he said. "It's good to discuss options, but at this point, I think that this market is taking a lot."

Mr. Siddall also offered new insight into Ottawa's consultations on risk-sharing between mortgage insurers and lenders, which could involve a deductible on government-backed mortgage insurance. He said critics of his risk-sharing proposal are ignoring ample academic research that "loudly warns against the drunken brew of elevated house prices and an advanced credit cycle."

A "modest" level of risk-sharing – amounting to 5-15 per cent of the value of a mortgage – could cause mortgage rates to rise between 10 and 40 basis points, he said. (A basis point is 1/100 of a percentage point.)

CMHC is also studying other risk-sharing options beyond a deductible, Mr. Siddall said, including a proposal from the banking industry for government-backed insurance to end when a loan falls below a certain threshold. Currently, insurance covers the entire life of a mortgage, typically 25 years. Banking officials have also supported the idea that Ottawa should raise minimum down payments even higher.

Mr. Siddall said Canada could also "serve as a laboratory" to experiment with "shared-responsibility" mortgages, a concept proposed by academics Atif Mian and Amir Sufi in their 2014 book House of Debt. They envisioned a program in which borrowers' monthly mortgage payments rise or fall depending on whether local house prices are going up or down, so that homeowners are more accountable during a booming market, but less financially squeezed in a crisis.

While Mr. Siddall said risk-sharing would ensure that mortgage lenders have "more skin in the game," it could also lead CMHC and other mortgage insurers to charge higher premiums in regions that have historically had more mortgage defaults, he said, such as rural communities, Eastern Canada and the North.

The comments from the head of Canada's housing agency show that, despite several rounds of rule-tightening, federal policy-makers are still concerned with how extended low interest rates are fuelling rising house prices and high levels of household debt, said Bank of Montreal chief economist Douglas Porter.

"It does seem like Ottawa is casting about for another way to try to keep the housing market under some kind of control, and it looks as if that job is mostly falling on CMHC now," he said.