Finance Committee on Feb. 1st, 2017

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Thank you to my colleague on the other side.

When we've heard from CMHC and OSFI and the Department of Finance, we've heard from the participants in the market who would know what is going on within the housing market. Having the minister here is just not necessary. He's been here a few times and he's been very thoughtful with his time with us.

But having CMHC, which oversees the insured portion of the housing market, has been more than sufficient.

[The Chair, Liberal, Wayne Easter]

Is there any further discussion?

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I respect the members of the government trying to protect their minister, but with all due respect, we had no answer by the officials the first day as to how this policy was developed. We then had a series of witnesses who said there was no consultation. I think it is incumbent, if we're going to do a comprehensive review of this decision, on the minister.... If it doesn't work for the minister, we will have to accept that, but for the government members to refuse to agree to invite the minister, I think, is appalling.

I would suggest that our colleagues on this committee agree that the minister be invited. Hopefully he can make it. Surely his officials could make it. I think it is important to get a better sense of how this policy was developed, because that obviously was not answered by the first panel of witnesses. At the same time, Mr. Chair, I think if we're inviting witnesses, I do believe we agreed the other day that the CEO of Canada Mortgage and Housing Corporation should be invited back. Unfortunately he couldn't make it the first day, and we understand that.

I really believe that it's important to invite the minister and let him make that decision, not his colleagues who sit on this committee.

[The Chair, Liberal, Wayne Easter]

Just on that point, we have invited the CEO for Canada Mortgage and Housing Corporation. He is unavailable on the day we're holding the meeting, which is the eighth.

We'll go to one more comment from this side, and then we'll go to the question.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Nobody is refusing to invite the minister. In fact I'm quite happy to support the invitation from this committee. However, let's just clarify a few things. There was no suggestion that nobody was consulted. In fact there was testimony that consultations were done. We also heard about the proposed risks to the system and the reaction to that. It is always in the government's best interest to respond and to react to market conditions.

I look forward to supporting this motion and hearing from the minister and officials on just how this policy came to be and how this will help Canadians.

[The Chair, Liberal, Wayne Easter]

We'll call the question.

(Motion agreed to)

[The Chair, Liberal, Wayne Easter]

We will extend an invitation to the minister.

Turning to the witnesses, we are here to—

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Excuse me, Mr. Chair, could I make another point?

Just as a matter of moving forward, the parliamentary secretary is not a voting member of this committee.

[The Chair, Liberal, Wayne Easter]

Yes. Sorry. It wasn't counted, Mr. Liepert.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Just briefly, Mr. Chair, perhaps you can clarify this. You said that we're going to have another meeting, and I think that's great. You also said that a lot of people would like to come. Now we're actually reinviting the current president of the Canada Mortgage and Housing Corporation and the minister.

To me, three hours to hear from both of those and from some of the other people may not be fair to the witnesses. You may want to consider extending that meeting, or perhaps, because we want to be flexible for the minister and the president, we can add another day.

[The Chair, Liberal, Wayne Easter]

I would be awfully surprised if the minister were able to come on that short a notice, but we'll extend the invitation and see what we can do. If we have to set up another meeting to have the minister, we may have to do that.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

That would be reasonable.

[The Chair, Liberal, Wayne Easter]

Turning now to our study of the Canadian real estate market and home ownership, I thank the presenters for coming forward. We will be under a bit of a timeline. We may not hear from all of you before we go to vote but we will be back.

We'll start with the Canadian Mortgage Brokers Association. Mr. Soni is the national president.

Go ahead.

[Ajay Soni, President, National, Canadian Mortgage Brokers Association]

Thank you, Mr. Chair, and thank you to the committee for inviting the Canadian Mortgage Brokers Association to speak about the current situation in the housing and mortgage finance industry in Canada.

As mortgage brokers, our members are uniquely positioned to offer insight into the industry. Our footprint in Canada as mortgage brokers is very extensive. As an example, mortgage brokers fund over $70 billion a year in mortgages. That's the level of activity.

It's all types of mortgages including residential mortgages, commercial mortgages, development and construction mortgages, refinancing, debt consolidation, apartment buildings, and rental properties. It's very extensive. In fact, over 55% of first-time homebuyers use a mortgage broker. Imagine a mortgage industry without mortgage brokers.

We also distribute funds for alternative sources of financing, such as mortgage investment corporations and private mortgages.

We have a level of knowledge we're very happy to share. We understand the unique challenges Canadians face when it comes to home ownership. Our members live and breathe these challenges with these homeowners and potential homeowners, and this happens throughout the country.

We like to say that mortgage brokers are at the tip of the spear when it comes to home ownership because we make the dream of home ownership a reality for many people. When it comes to the issue of home ownership cost, that tip of the spear is the culmination of many costs that result in an end price for a home.

There are many factors that determine pricing, and many people seem to be alarmed at what is perceived as the high cost of home ownership, which also goes into the high cost of rent, because somebody has to own those properties. Ultimately these costs have to be paid, and that's why we are at the tip.

For most Canadians this is paid for by taking out a mortgage. It's that simple. As costs increase, your mortgage amount will increase as well.

As I have said, many observers and Canadians are alarmed at the high costs they face, or perceived high mortgage amount that's required to own a home. It's very important that we understand those costs, and we've submitted a letter to the committee. There are many factors to those costs.

We know that there is always the land cost, but when you look at development, there are changes in the building code every year. This increases costs. We don't build the same type of home we built 20, 30, or 40 years ago. We're always building a better product. That costs money. That may result in a higher mortgage amount for somebody.

Municipal fees are also a factor. As mortgage brokers, we are involved in development financing. We see lots of different costs in different municipalities. These costs are development cost charges, school fees, land acquisition fees, and land dedication fees. All of this actually adds to cost.

Municipal by-laws also add to cost. There's a requirement, as I said, for land dedication.

We're looking for livable community concepts. Urban planning professionals build better communities. These all cost money, and they culminate in the end price of homes for Canadians.

There's also a slow and frustrating development process that our developer clients see. They have to pay for that. Holding property costs money. They take out mortgages. Their interest costs accumulate, and they have to pass that on to the end purchaser.

We understand how these costs are manifested, and we are at the end, financing Canadians.

What we like to say is that there are also finance costs involved. We've seen recent changes to CMHC's insurance premiums. In our letter, we've actually submitted some examples, and we can refer to that in the question period, but in some cases now, the insurance premium is as much as the down payment that a homeowner is asked to put down.

Five per cent is the minimum down payment required. As an example, on a $500,000 purchase, $25,000 is the down payment. In an extreme case, you would pay about $22,000 in insurance costs. That's a very onerous cost at the end of the line.

The Canadian Mortgage Brokers Association would like to offer our consultation services and let you know that we are experts. Before changes are made to mortgage policy, we'd love to be consulted and provide the insight that we as professionals would love to impart to you.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Soni and Mr. Hamblin, and thank you, Ms. McKenney, for coming.

From the Association des professionnels de la construction et de l'habitation du Québec, we have Monsieur Vincent and Monsieur Lambert.

[François Vincent, Policy Director, Association des professionnels de la construction et de l'habitation du Québec]

Hello and thank you very much.

My name is François Vincent and I am the policy director of the Association des professionnels de la construction et de l'habitation du Québec. With me is Georges Lambert, our senior economist.

Founded in 1961, the APCHQ now represents 17,000 small and medium-sized businesses in the construction and residential renovation sectors in Quebec. Appearing before the Standing Committee on Finance today allows me to present their views. Thank you very much for this opportunity.

The APCHQ maintains that we must focus on the real estate market and access to ownership.

I invite my colleague to give you an overview of the situation, which is explained in detail in our brief.

[Georges Lambert, Senior Economist, Association des professionnels de la construction et de l'habitation du Québec]

The housing sector, which includes new construction, residential renovation, repairs, and maintenance, is an important sector. In 2015, the economic value of this sector in Canada was over $133 billion, or close to 7% of the GDP. In Quebec, its value was $26 billion, or close to 8% of its GDP.

Our sector creates many good jobs. In 2013, for example, renovation and new construction helped create more than 172,000 full-time jobs in Quebec.

The federal government also benefits in terms of tax revenues. A $270,000 house sold in Quebec, for example, yields $16,300 in tax and incidental revenues, from construction to the time of sale. A $35,000 renovation contract yields close to $2,900 in tax revenues for the federal government.

As to the real estate market, despite relative market stability in the past few years, new construction has dropped off.

In Quebec, there were close to 39,000 housing starts in 2016, a 2.7% increase over 2015. In the past four years in Quebec, housing starts have levelled off at about 38,000.

While these numbers are positive, over a longer period, housing starts have decreased by 33% since the peak in 2004. Total housing starts have fallen off from close to 58,500 in 2004 to close to 39,000 in 2016. Roughly 1,800 fewer homes are built in Quebec every year. This slowdown can in large part be attributed to a drop in the number of households in Quebec. There are other factors, however, which we will discuss.

The thing that must be understood and that we wish to emphasize here are the benefits associated with becoming a home owner and acquiring one's own home. Home ownership is a way for households to build personal wealth. Home owners have higher net worth than renters. Moreover, once home owners retire, they enjoy benefits representing between 10% and 15% of their income.

Quebec has a lower rate of home ownership, however. Home ownership is at 61% of households in the province, as compared to 69% for Canada as a whole.

The question we are asking today is how can we help families become home owners? We must reduce the main barrier to making a down payment, which is an obstacle for seven out of 10 young people, according to a survey we conducted.

This survey also showed that it takes young people about eight years to save enough for a down payment on their first home. A few years ago, the Government of Canada decided to protect the financial market, taxpayers, and households by tightening mortgage insurance rules. As you know, nine restrictions on lenders and mortgage insurers have been announced since 2008 in order to tighten access to mortgage insurance.

The most recent measure, announced on October 3, 2016, will have major repercussions on the real estate market in Quebec. Access will be more difficult for 74,000 households, the number of housing starts could drop by close to 6,900 in 2017, and home resales could fall by 7%.

These decisions have had a significant impact in Quebec, which is already lagging in home ownership.

I will now give the floor to my colleague, François Vincent.

[François Vincent]

We would now like to draw your attention to the four recommendations we make in our brief. These four recommendations could help the government achieve its objectives of preserving the integrity of the financial market, protecting households from excessive debt, and containing the overheating of the real estate market, while also providing the missing piece that would enable people to purchase their first home.

We hope the committee will formally recommend them and that government MPs will present them convincingly to the Minister of Finance in view of the upcoming budget.

First, we suggest that an intergenerational home buyer's plan be created to allow parents to draw on their RRSPs so they can help their child with a down payment on their first home. This withdrawal would be repaid according to the applicable conditions of the home buyer's plan.

There are many parents who would like to help their child make a down payment on a home, but they do not necessarily have tens of thousands of dollars in their chequing accounts. By drawing on their RRSP, they could help their child purchase a home.

Moreover, these additional funds could decrease the amount borrowed and reduce the lender's risk. There would be a lot more down payments of 20% of the property's value, meaning that the borrower would not need mortgage insurance.

Such a measure, which would not cost the Government of Canada anything, would mean that the regional real estate markets that are not in the overheated areas of Vancouver and Toronto would not suffer from the recent tightening of mortgage rules, thereby preventing the very alarming figures cited by my colleague Mr. Lambert from becoming a reality.

Secondly, we would like to recommend ...

[The Chair, Liberal, Wayne Easter]

Mr. Vincent, could you just name your three other points without the explanations?

In about a minute and a half we're going to have to leave to vote, and we have the brief.

[François Vincent]

I will.

Secondly, in order to facilitate down payments, we recommend that a measure be created to help first-time buyers make a down payment.

Third, we recommend increasing the GST rebate on new homes for first-time buyers.

Fourth, we recommend increasing the tax credit for first-time buyers.

We will be pleased to answer your questions and provide further details on all these excellent recommendations.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

I also thank you as well, as I know you, and I believe one other group, had to reduce your original briefs to meet our word count criteria. We thank you for that.

We will suspend, and we'll hear from the other two witnesses as soon as we reconvene after the votes.

[The Chair, Liberal, Wayne Easter]

We'll reconvene now.

I will just explain to members where things are at. There will be another vote at 5:45. We will tighten up the questions to the current witnesses and try to finish at 5:30. That will give people time to grab a bit of a snack here, go to vote, and come back and start with the second series of witnesses. That's how we will do it.

We will now turn to Mr. Lloyd from DLC Canadian Mortgage Experts.

[Michael Lloyd, Mortgage Expert, Team Lead, DLC Canadian Mortgage Experts]

Thank you, Mr. Chairman and committee.

Thank you, fellow witnesses.

I've been a practising mortgage broker since 1999 in the Vancouver area. I have a lending background going back to 1988. Our company serves both B.C. and Alberta. We have 130 mortgage brokers on our team, and we did 3,800 mortgages last year for a total of $1.36 billion.

Of the changes enacted on October 3 by the Minister of Finance, the one that impacted Canadians the most severely was bringing consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test.

Page 36 of the Liberal Party of Canada's platform piece states, “Government should base its policies on facts, not make up facts to suit a preferred policy. Common sense, good policy, and evidence about what works should guide the decisions that government makes.”

The government did nothing to find out from those within the industry the long-term effects of these changes. By making the changes, they've impacted a large number of Canadians, not just first-time buyers but those already in their homes. By rushing these changes through without researching their impact, they've damaged the competitive nature of the industry and skewed it in favour of one group over others. This will result in more expensive lending for all Canadians.

As an example of this, the X family who live in North Vancouver have a mortgage for $250,000 that is now coming up for renewal. Since their home is now assessed at over one million dollars, they are now considered uninsurable and must pay a higher rate on any mortgage term.

Another example is that of Mr. A, who is separated from his wife and has been working out a separation agreement since last spring. He had planned to buy her out of the matrimonial home in the Kootenays but no longer qualifies, and now the home must be sold.

We, of course, have had a number of first-time buyers who have tried to save the down payment needed to enter the market and buy their first home. Many of those reduced their expectations of buying a house and are instead focused on townhouses and condos. With payments forced to be made for over 25 years, their buying power has been further diminished.

Our housing industry in Canada is sound. We survived the meltdown of 2007. We have had a positive impact on the economy. CMHC is a money-maker for the government and is safer than ever. These changes were not needed and will only cause harm to the majority of Canadians.

I recommend the following changes be made to the criteria for insured and non-insured mortgages: allow 30-year amortizations, stop attempting to restrict investment in rental properties, and remove the limit on insurable mortgage size, which is currently one million dollars.

I welcome your questions. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Lloyd.

We will now turn to Mr. Taylor from Mortgage Professionals Canada.

[Paul Taylor, President and Chief Executive Officer, Mortgage Professionals Canada]

Thank you very much, Mr. Chair, and thank you for the opportunity to present to the committee today.

My name is Paul Taylor. I'm president and CEO of Mortgage Professionals Canada, Canada's mortgage industry association representing 11,500 individuals and over 1,000 companies. We include mortgage brokers, mortgage lenders, mortgage insurers, and service industry providers.

The mortgage broker channel we represent originates 33% of all mortgages in Canada and over 50% of mortgages for first-time homebuyers, which equates to approximately 80 billion dollars' worth of economic activity annually. Canadians are also increasingly choosing mortgage brokers to obtain a mortgage. Our most recent data shows that, year over year, mortgage brokers have been used 9.6% more this year than last.

Not all the traditional bank products are available through the mortgage broker channel, which is an important distinction to make. The recent changes are having a cumulative negative impact on the mortgage marketplace and ultimately on the Canadian consumer. In light of this, we're asking for some slight amendments to portfolio insurance, which I will get to shortly.

As the committee is probably very well aware, as of November 30, all mortgages submitted for inclusion in portfolio insurance are now subjected to the same stress test as high-ratio insured mortgages and many important categories have also been made ineligible. These changes disproportionately impact non-traditional bank lenders who rely on the portfolio insurance mechanism for liquidity and ease of access to capital.

As an example of the impact of these changes, Genworth Canada estimates that if submitted today approximately one-third of their total volume of mortgage insurance written in October 2016 would no longer be eligible.

Banks can take loans onto their balance sheets. Smaller lenders do not have the same capital volumes to effectively compete. As a result, all ineligible portfolio insurance mortgage products now have to be financed by the smaller lenders through other private capital mechanisms, which makes their products more costly for consumers and therefore uncompetitive.

From a policy perspective, if the intent of the stress test is to protect highly leveraged buyers from themselves, then all consumers should be subject to the stress test to ensure a fair marketplace. OSFI could achieve this by amending the required underwriting guidelines.

Also setting the stress test at the Bank of Canada's current five-year rate serves to imply that the government's intention was to favour the big banks over smaller lenders. This rate is set by the mode of the big five banks' posted rates, which in effect allows the banks to control the rate that creates their competitive advantage.

An important contextual note is that while many of the non-traditional bank lenders do not fall within OSFI's regulatory purview, it would be incorrect to suggest they are not regulated. Each province has its own regulations related to mortgage lending and non-traditional bank lenders statistically originate mortgage loans with equivalent or slightly better default rates than the banks. For Canadian mortgage consumers, non-traditional bank lenders play an invaluable and necessary role in a competitive marketplace.

There are some significant negative impacts on price of these changes. As of January 1, the average cost for a conventional mortgage fund has increased by 25 basis points; in real dollars, that's about $2,300 over the five-year term. To the full amortization period of the mortgage, it's about $10,400.

In addition to these additional costs, mortgage insurers are increasing their insurance premiums on non-conventional mortgages for the third time in three years. This is due to OSFI's newly released capital adequacy guidelines and the premiums in some loan-to-value categories are jumping by more than a full percentage point of the value of the mortgage. These, of course, will be costs passed on to the ultimate consumer.

The stress test also creates a reduction in the purchasing power for many Canadians, which some of the other panellists have discussed. We have some regional issues as well that were created by them. Many will be first-time buyers.

Our chief economist, Will Dunning, tells us the stress test will mean homebuyers will have their calculated total debt service ratios increased by 5 to 7.5 percentage points, which is going to have a material impact on their purchasing power without really changing any of their specific details. The spin-off impacts of a reduction in purchasing power for the middle class could have the unintended consequence of creating the scenario that these policies aim to prevent, which is a national debt crisis caused by a significant economic decline.

The new capital requirements from OSFI also require insurers to look at two new characteristics of a loan to determine how much capital they need to hold on hand to portfolio insure it: credit scoring and geography.

We're concerned that these changes create regional price and access disparities that will disproportionately impact middle-class Canadians in areas deemed high risk. The proposal to introduce risk sharing into the market would also cause major price and access disparities. While Canada has enjoyed historically low default rates, somewhere below one-third of 1%—I think it was 0.28% on Monday—data has always demonstrated that job losses are the number one trigger for mortgage defaults.

Under a risk-sharing structure, as regional economies suffer downturns, local mortgage costs are going to increase proportionately. We would suggest that this is the exact opposite of the result the government would like to see, as opposed to the social mechanism that CMHC and the securitization program is intended to create.

In conclusion, the announced changes negatively affect the mortgage broker channel as a whole, and Canadian consumers have been more and more inclined to use the services of a broker to provide choice, advocacy, and support, and to assist in the technical requirements of mortgage qualification. Placing competitive disadvantages then on the non-traditional bank lenders will adversely affect this segment of the Canadian mortgage marketplace, which consumers clearly are voting for with their purchasing habits.

We have five recommendations that we would like the committee to consider to help mitigate the effects of these changes.

First, suspend all regulatory measures not yet implemented.

Second, adjust the November 30 change to allow for refinanced mortgages to be included again in portfolio insurance. If an 80% loan-to-value ratio is unacceptable, please consider reducing the threshold to 75% rather than removing the eligibility of these products entirely.

Third, the government should reconsider the increased capital reserve requirements implemented in January for insured mortgages.

Fourth, we recommend that a review be conducted into the long-term impact of regional-based pricing on the Canadian economy as a whole, and the potential additional harmful effects on already strained regional economies.

Finally, please uncouple the stress-test rate from the big five banks’ posted rates. Use an independent mechanism to determine the rate and require its use to qualify all mortgages, not just those insured.

Thank you very much, indeed.