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The former head of the CMHC called out what he saw as the irresponsible practices of real estate agents, lenders and policy makers who encouraged Canadians to take on more mortgage debt.

Graeme Roy/The Canadian Press

Few people working in Canada’s real estate industry shed a tear when Evan Siddall stepped down as head of Canada Mortgage and Housing Corp. in April after seven years spent lecturing them about, among other things, their greediness.

To his credit, Mr. Siddall felt obliged to call out what he saw as the irresponsible practices of real estate agents, lenders and policy makers who encouraged Canadians to take on ever-increasing levels of mortgage debt. That he did so with all the subtlety of a jackhammer only ended up undermining his influence, however.

Mr. Siddall angered Canadian bankers with the blunt missive he sent out last August criticizing lenders for shunning CMHC in favour of private mortgage insurance providers after the federal agency tightened eligibility criteria to prevent borrowers from taking on too much debt. The outspoken CMHC chief feared rock-bottom interest rates had lulled buyers into piling on debt that would leave them and the entire housing market vulnerable when rates inevitably rose.

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“We have sustained a reduction in our market share to promote a more competitive marketplace for your benefit. However, we are approaching a level of minimum market share that we require to be able to protect the mortgage market in times of crisis. We require your support to prevent a further erosion of our market share,” Mr. Siddall wrote then. “If you want us in wartime, please support us in peacetime.”

The letter went over like a lead balloon. Not only did mortgage lenders ignore Mr. Siddall’s pleas, they shifted even more of their business away from CMHC to private insurers Sagen MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., which maintained looser eligibility criteria for borrowers who make a down payment of less than 20 per cent to buy a home. By the first quarter of 2021, CMHC had seen its share of new underwriting business fall to 23 per cent from almost 50 per cent a year earlier.

Romy Bowers, Mr. Siddall’s successor at CMHC, wasted no time in attempting to repair the damage. This month, she scrapped the restrictive eligibility criteria put in place by Mr. Siddall, lowering the minimum credit score and raising the maximum debt ratios borrowers are allowed to maintain in order to qualify for CMHC insurance.

“We are taking this action because our July 2020 underwriting changes were not as effective as we had anticipated and we incurred the cost of a decline in our market share. A healthy market share is an important consideration as it helps us fulfill the financial stability aspect of our mandate,” CMHC said in a July 5 statement announcing the move.

Mr. Siddall clearly miscalculated if he believed moral suasion by CMHC would be enough to persuade real estate players to curb their enthusiasm while the federal government and the Bank of Canada continued to pump record amounts of liquidity into financial markets during the pandemic. Except for the Office of the Superintendent of Financial Institutions, which toughened its own mortgage stress test in June, policy makers in Ottawa had been working at cross purposes with CMHC by pouring stimulus fuel on a real estate market that needed none.

The result has been a year-over-year 26-per-cent increase in the average price of a typical Canadian home in June. That was down from 38 per cent in May, as the extraordinary price gains of the previous months showed some signs of moderating. Prospective buyers are rightly becoming skittish about purchasing at the top of the market, especially as many economists predict the Bank of Canada will begin tightening monetary policy earlier than previously expected.

Still, Canada’s housing market remains dangerously overheated, and it might not take much for it to suddenly change direction.

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“With the effectiveness of monetary policy much larger than at any point in the post-war era due to a record-high level of household debt, a relatively small increase in rates could have a notable impact on the market,” CIBC economist Benjamin Tal wrote in a July 16 report co-authored by Equifax’s William Johnston.

The report noted that while the average mortgage size for first-time buyers increased 19 per cent in the first quarter of 2021, monthly payments were up by only 3.7 per cent. “Longer-term, however, there are concerns that the rise in mortgage values in lower-income areas could be a challenge as interest rates rise,” they wrote.

The longer-term consequences of excessive mortgage debt were precisely what Mr. Siddall was warning about when he sent his letter to lenders almost a year ago, saying there was a “dark underbelly” to their business that he sought to expose.

“The economic cost of COVID-19 has been postponed by effective government intervention; it has not been avoided,” Mr. Siddall explained then. “Excessive household borrowing will make the pain of the deferred COVID-19 economic adjustment worse.”

His warning fell on deaf ears. In the end, CMHC may not be alone in paying the price for that.

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