Canada's private-sector mortgage insurers are urging Ottawa to curb risks in the housing market, but warn that targeting first-time home buyers will do little to slow prices in Toronto and Vancouver.
Stuart Levings, president and chief executive officer of Genworth MI Canada Inc., and Andy Charles, president and CEO of Canada Guaranty Mortgage Insurance Co., say that first-time home buyers, who are the main users of mortgage insurance, have largely been priced out of the country's most expensive cities and that adding more restrictions on mortgage insurance are only likely to affect other regions where home prices are already soft.
"That would have consequences in Calgary, Edmonton, Montreal, Halifax, all those marketplaces that are currently relatively flat or moderately decreasing," Mr. Charles said in an interview at his downtown Toronto office. "It would have a negative effect in other urban marketplaces that don't have names like Toronto or Vancouver."
Since 2008, the federal government has introduced several rounds of changes to rules around mortgage insurance in order to reduce risks in the housing market.
The most recent changes, which took effect in February, doubled the minimum down payment on the portion of a home priced between $500,000 and $1-million to 10 per cent. At the time, Finance Minister Bill Morneau said the measures were aimed at Toronto and Vancouver. But prices in both markets have continued to soar.
Instead, Mr. Levings said it was Calgary, a market already hurting from the fallout of low oil prices, that bore the brunt of the higher down-payment requirements.
"What was already a somewhat challenged market, now with that extra down payment requirement has just killed it even further," he said in an interview at Genworth's Oakville, Ont., headquarters. "I certainly think that was one of the acknowledged unintended consequences."
After years of changes to mortgage insurance rules, Mr. Charles estimates that first-time home buyers now make up roughly 30 per cent of the Canadian housing market, down from as much as 50 per cent in the past. The market for mortgage insurance has followed a similar downward trajectory, shrinking from as much as 45 per cent of the mortgage market in 2007 to closer to 25 per cent today.
Both CEOs said new rules to slow soaring home prices in some markets should instead be targeted at uninsured mortgages.
Under current regulations, borrowers can avoid paying for mortgage insurance if they have a down payment of at least 20 per cent. Homes valued above $1-million aren't eligible for mortgage insurance, along with second homes and mortgage refinancing, meaning those borrowers must also have a down payment of at least 20 per cent.
The rules were aimed at reducing speculation and keeping buyers from becoming too financially stretched by forcing them to have a significant amount of equity in their homes. But earlier this month, the Bank of Canada raised concerns about growing risks in the uninsured market – where many borrowers are scraping together a 20-per-cent down payment and then extending their amortization periods as long as 35 years in order to afford their mortgages.
The central bank said 58 per cent of all uninsured mortgages written by the major banks last year had amortization periods beyond the standard 25 years.
Both Mr. Levings and Mr. Charles said Ottawa should restrict the amortization on uninsured mortgages to 25 years, matching the rules for insured mortgages. They said minimum down payments for uninsured mortgages should also be raised – Mr. Levings suggested to as much as 30 per cent.
"Is it the right solution to say let's just keep amortizations extended so these folks trying to buy in the mid-range of the market can continue to buy?" Mr. Levings said. "I don't think that's a healthy solution."
The mortgage insurers added their concerns to a growing chorus of voices from the financial sector urging more intervention from Ottawa to slow escalating prices in Toronto and Vancouver. Home prices in both cities have seen double-digit increases over the past year, with average prices surging nearly 30 per cent in Greater Vancouver and 15 per cent in Greater Toronto.
An influx of foreign money into high-end homes is the main driver behind the hot Toronto and Vancouver markets, Mr. Levings said, pointing to the need for Ottawa to collect more data on offshore real estate investors. The rush of money into luxury properties has helped fuel prices of less expensive homes in those cities as local buyers scramble to compete for a dearth of more affordable options.
"When there's a run on some product – at Christmastime the favourite toy – people start to realize it's the favourite toy. Before you know it, everyone is rushing to Toys "R" Us and by the time everyone catches up, there's no more toys to be found," Mr. Levings said. "From a foreign capital point of view, I think there was a little bit of me-too or I-don't-want-to-lose-out syndrome, where money started to flow [into housing] at an increasingly accelerated pace."