A for sale sign in Toronto.1--Sarah Dea/The Globe and Mail
Canada Mortgage and Housing Corp. said mortgage refinance activity has dropped nearly 40 per cent since Ottawa imposed stiffer mortgage rules, a sign that efforts to curb the country's rapid rise in debt levels are having an impact.
But Canadians' exposure to debt is an issue that will continue to press Finance Minister Jim Flaherty. Some experts say another round of rule changes is needed as consumer debt levels rise faster than incomes, while others argue further tightening in the mortgage market could slow the housing industry and spark a recession.
CMHC, a crown corporation required to issue quarterly financial results under a new law, reported higher second-quarter profits Monday and offered insight into how the mortgage market is faring.
It said mortgage refinancings that it insures fell by almost 40 per cent and have continued to remain around that level since Mr. Flaherty changed the mortgage insurance rules earlier this year in a bid to stop indebted Canadians from using their homes as ATMs. One of the changes, which took effect in March, reduced the maximum amount that consumers can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
Mr. Flaherty also cut the maximum term of new insured mortgages to 30 years from 35, and said the government will no longer guarantee mortgage insurance on home equity lines of credit. Mortgage insurance, the vast majority of which is backed by the government, protects the bank in the event the homeowner defaults.
Ottawa is walking a tightrope. It fuelled the mortgage market to stoke the economy during the financial crisis and hopes that a relatively strong housing market will continue to support growth. But it is also trying to ensure that the most vulnerable Canadians don't take on more mortgage debt than they can handle. Mr. Flaherty has tightened mortgage insurance rules three times as a result.
"The minister tightened mortgage rules to tighten the market and today's results show the changes are indeed working to moderate the market," a spokesman for Mr. Flaherty said.
Finn Poschmann, vice-president of research at the C.D. Howe Institute, argued that "the stunning drop in CMHC-backed high loan-to-value refinancing carries a powerful message about the extent to which the government, through CMHC, had been promoting risky lending.
"I never would have expected such a drop and it points to CMHC's key role in supporting big debt loads among Canadian households," Mr. Poschmann said in an e-mail, adding that the drop is good news.
Mortgage refinancing has grown in popularity in recent years, but the exact level of activity is unclear. Canadian data is not collected by either the central bank nor the banking association. CMHC was unable to provide more details yesterday afternoon.
"It's very clear that those rules did change the refinancing landscape," said Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce. "It's much weaker than it was, and that's exactly what the doctor ordered."
Mr. Tal believes further rule-tightening could push the economy into recession. "When it comes to credit, really the only thing kicking is the mortgage market," he said.
Mortgage balances had been growing at double-digit rates, but that has slowed. The year-over-year change in mortgage balances stood at 7.4 per cent in July, down from 10.2 per cent a year earlier, a 27 per cent slowdown in the rate of growth, noted Craig Alexander, chief economist at Toronto-Dominion Bank. And it appears that the growth of home equity lines of credit has dropped from about 20 per cent in the middle of 2010 down to around 1 to 2 per cent, he added.
Canadians appear to be paring back the size of loans they request from banks, reducing the pace of debt growth, but are nevertheless continuing to take on new debt.
That's not enough to erase Mr. Alexander's fears about high consumer debt loads. Incomes are only growing at a modest pace, while consumer spending is still being fuelled by low interest rates.
And the U.S. Federal Reserve's decision to keep interest rates at rock bottom levels into 2013 suggests that significant rate hikes by the Bank of Canada are also unlikely for some time. That reduces the incentive for borrowers to cut their debt loads now. Mr. Flaherty and central bank governor Mark Carney have been warning Canadians to bring their debt levels under control because rate hikes will make their debt more expensive.
"Given the limitations on monetary policy, which cannot target one segment of the economy, there might be a need to further tighten mortgage insurance rules if consumer debt growth accelerates once again," Mr. Alexander said. "Make no mistake, there is a day of reckoning coming when debt service costs rise in the future, but it won't be in 2011 or 2012."
In the meantime, he's expecting a small decrease in home prices, which will further hamper borrowers. Some more bearish observers, such as Capital Economics economist David Madani, are predicting house prices will fall by 25 per cent in coming years.
Royal Bank of Canada said that higher home prices and mortgage rate increases caused housing affordability to slip two quarters in a row this year, driven in significant part by Vancouver. A number of banks have boosted the rates on their variable-rate mortgages since then, in an effort to protect their profits which have been hurt by low interest rates and slower lending growth.
CMHC said Monday that its second-quarter profits rose 19 per cent to $383-million, despite Mr. Flaherty's rule changes, thanks largely to mortgage bonds, lower expenses, and the sale of financial instruments. The amount of insurance it has in force rose to $536-billion at June 30, nearly $200-billion higher than in 2007, prior to the credit crisis.
Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals, said CMHC's disclosure makes it clear the rules had an impact and further changes aren't needed.
"There is now obviously less choice for homeowners in terms of their ability to refinance," he said. "You need flexibility in the system. Homeownership is important, it's a good public policy."