Finance Committee on Feb. 8th, 2017

[Gary Mauris]

It is.

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

So what am I not getting here? They say it's regionally neutral yet they take and assess, as part of the formula, where a home is located.

[Adil Mawji]

The costs are not regionally neutral. The costs are spread across the country. Alberta may have a lower risk than B.C. does, but it's the same cost to refinance a home—an uninsured mortgage, too—or to purchase a home with 20% down or more, for somebody from British Columbia as it would be for someone from Alberta or anywhere else in the province. The cost to the consumer is the same.

[The Chair, Liberal, Wayne Easter]

We're going to have to end it there.

Mr. Simonsen, you wanted in on the pause, so perhaps you can limit it to15 seconds.

[Gary Simonsen]

Thank you.

I just wanted to comment that certainly our outlook would be that you're talking, at best case, about having the data to really assess what kind of impact these changes would make beginning in the summer.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you all for your presentations and your direct answers. We will suspend for a few minutes while the next witnesses come to the table.

[The Chair, Liberal, Wayne Easter]

We will come to order.

We will start with the Appraisal Institute of Canada. We have Mr. Brewer, the president, and Mr. Lancastle, the chief executive officer.

Go ahead.

[Keith Lancastle, Chief Executive Officer, Appraisal Institute of Canada]

Thank you very much, Mr. Chairman, honourable members, and ladies and gentlemen. My name is Keith Lancastle. I'm the chief executive officer of the Appraisal Institute of Canada.

Joining me is our national president, Dan Brewer, who is an AACI, P.App-qualified fully designated member of our association from the Toronto area. We are very pleased today to present our members' concerns and recommendations to the Standing Committee on Finance as you consider issues around the Canadian real estate market and home ownership.

The Appraisal Institute of Canada has over 5,200 members, who provide unbiased opinions of value on residential, commercial, and all other types of real property. Our members are university-educated and complete a rigorous program of professional study. The scope and the conduct of our members' services are defined by our Canadian Uniform Standards of Professional Appraisal Practice. As a self-regulatory body, we have a strong focus on consumer protection. We maintain a robust disciplinary process, and we offer a mandatory professional liability insurance program to help protect consumers. AIC is very supportive of the Office of the Superintendent of Financial Institutions' guidelines B-20 and B-21 and some of the other more recent measures that have been implemented to help stabilize the Canadian housing market. Today, however, we would like to discuss two areas of concern. First, we want to address the risk of potential dilution of sound mortgage underwriting practices across the marketplace. Our second concern is in the area of the increasing potential for, and risk of, mortgage fraud.

In the area of sound mortgage underwriting practices, we know that the majority of Canadian mortgage lending is still being done through federally regulated institutions, but the market share of non-federally regulated financial institutions continues to grow. The inherent risk is that the mortgage underwriting practices of these two categories of lenders may be inconsistent and may over time result in a two-tiered lending system.

The reality is that despite federal policies and procedures to cool the real estate market, there are still many Canadians who are very desperate and determined to enter or remain in the housing market. Some existing homeowners now find themselves in the situation where they must consolidate their debt. In either situation, if borrowers are turned away by a federally regulated institution, they are more likely to look towards other lenders to secure mortgage funding.

We recognize that non-federally regulated financial institutions are a very important part of the market. However, in some cases these lenders serve a cohort of the Canadian marketplace and Canadian consumer base that may be higher risk in nature. Unfortunately, there is limited information available on the full scope of who these lenders are or what their mortgage underwriting practices may be. Put another way, there is a growing share of the market that is not necessarily competing on the same basis and to which the same regulatory oversight may not apply. This scenario, in our opinion, is a potential risk to the financial system and to the housing market.

The absence of a level playing field could well have an unintended impact on the market: first, by essentially increasing the indebtedness of Canadians; second, with higher-risk borrowers entering or remaining in the market, which exacerbates issues around housing demand; and third, through the increasing likelihood of mortgage default in the event of a decline in the real estate market.

We are aware of non-federally regulated lenders that apply very stringent underwriting approaches to both borrower qualifications and collateral valuation. We are concerned, however, about the actions of lenders that may have less rigorous approaches to mortgage underwriting. Guideline B-20 has established a very sound and balanced framework, recognized throughout the world, that requires assessment of not only the borrower's capacity and willingness to repay but also a commitment to strong valuation fundamentals. As we have seen in other countries, the absence of a balanced and consistent approach can and will have a significant impact on the consumer and on the real estate market as a whole.

Like many of the other organizations that have appeared before this committee, AIC agrees that there is a need for the Government of Canada to take time to analyze the impact of recent policies before implementing new regulatory measures. That said, AIC is also recommending the expanded application of guidelines B-20 and B-21 as well as the recently announced measures to any and all organizations that are providing mortgage financing. This step will do much to ensure more consistent lending practices and make for a more stable marketplace.

Second, AIC would like to express our concerns about the potential increase in mortgage fraud. This concern is supported by a recent Equifax study that revealed that instances of mortgage fraud in Canada have risen along with the escalating prices in the Toronto and Vancouver areas. Equifax has noted that “the number of potentially dishonest mortgage applications has grown by 52 per cent over the past 4 years.”

Appraisers have the expertise to raise red flags in a real estate transaction, helping lenders better detect any potential mortgage fraud concerns before they occur. On-site appraisals carried out by qualified professionals are an effective way to help all parties involved in mortgage underwriting to detect fraud and to better mitigate lending and property investment risk. To that end, our recommendation is that all organizations involved in lending work together to better detect potential incidents of fraud. The government can encourage and potentially facilitate sector-wide dialogue and engagement on this topic.

Mr. Chairman and honourable members, we are privileged to have been invited here today to share the perspectives of our members. We appreciate the chance to share our recommendations and would also be very pleased to respond to any questions or comments you may have.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Keith.

Now we have, from the Québec Federation of Real Estate Boards, Ms. Guy and Mr. Cardinal.

[Pénéla Guy, Chief Executive Officer, Québec Federation of Real Estate Boards]

Thank you, Mr. Chair.

Good afternoon, everyone.

First, let me introduce ourselves. My name is Pénéla Guy and I am Chief Executive Officer of the Québec Federation of Real Estate Boards. With me is Paul Cardinal; he is an economist and our manager of market analysis.

We would like to thank the committee for the opportunity to appear before you today on this very important matter.

The Québec Federation of Real Estate Boards is a non-profit organization that oversees the 12 real estate boards in the province of Quebec. Our organization seeks to defend, protect and promote the interests of real estate brokers in the province through the provision of services in the areas of professional practices, mediation and arbitration, public affairs and market analysis. In 2016, the 13,000 brokers whom we represent completed around 79,000 real estate transactions, with an economic impact estimated at $2.9 billion.

Although we acknowledge the government's good intention to address concerns raised by the Vancouver and Toronto markets, we believe it is important for committee members to understand the negative impacts the recent tightening of mortgage rules will have on the Quebec real estate market.

[Paul Cardinal, Manager, Market Analysis, Québec Federation of Real Estate Boards]

In 2017, in fact, we are forecasting a drop in residential sales in Quebec in the order of 7%. Those most affected by the new mortgage rules are mostly buyers with a down payment of less than 20%, meaning mostly first-time buyers.

According to our estimates, the interest rate stress test alone should exclude between 5,000 and 6,000 Quebec buyers from the market in 2017. That represents about $220 million less in ancillary expenses. In addition, since the purchasing power of a number of households will be cut off by the stress test, we forecast that Quebec property prices will not increase in 2017.

The Quebec real estate market should not suffer the effects of the overheating in Toronto and Vancouver. In fact, the Quebec real estate market is not the same, for the following three main reasons.

First, our property prices are much more affordable than in other Canadian provinces. In 2016, the average property price in Quebec was $281,000, compared to $471,000 in the rest of Canada. Even Montreal, where the average property price is approaching $350,000, compares favourably with the average property price in Toronto, which is $730,000, and in Vancouver, where the average is almost three times higher, at just over $1 million. In Quebec, the lower prices mean that excessive levels of household debt are less of a factor.

Second, far from seeing any overheating in a number of regions, current conditions for the Quebec real estate market shows the balance tilting towards buyers. For that reason, property prices have grown only 5% between 2012 and 2016, that is, since the maximum amortization period was tightened from 30 years to 25. The soft landing has been achieved and other measures are unjustified, if not harmful, because they could cause property prices to drop in a number of regions. Real property is generally a household's greatest asset.

Third, Quebec is significantly behind the other Canadian provinces in terms of the rate of home ownership. In fact, only 61% of Quebec households own their homes, whereas the rate in all the other Canadian provinces without exception is 70% or more. The new mortgage rules that have been in force since last October will put a major brake on ownership. For example, before last October 17, to qualify for a $300,000 loan, gross household income used to have to be about $59,000. Today, it has to be about $72,000. That clearly shows how the “stress test“ will exclude a significant number of potential middle-class buyers.

On the heels of the stress test, which requires lenders to use a hypothetical rate of interest, comes a third increase in mortgage insurance premiums in four years and reduced competition in the mortgage market. Those three factors will come together and prevent a number of young families from achieving their dream of home ownership under the same conditions as the generations that went before.

[Pénéla Guy]

By way of conclusion, the Québec Federation of Real Estate Brokers proposes two possible solutions.

First, just like the Canadian Real Estate Association and the Association des professionnels de la construction et de l'habitation du Québec, we ask the government to enhance and expand the Home Buyer's Plan.

Second, we propose that the government set up a task force to look into not only future changes to mortgage rules but also all types of consumer loans.

In closing, we offer the government our full co-operation in regard to any matter that affects the real estate market.

We will be pleased to answer questions from members of the committee.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you both very much for your presentation and for your recommendations.

We'll turn now to the Urban Development Institute of Nova Scotia.

Mr. Graham, the floor is yours.

[David Graham, Director, Urban Development Institute of Nova Scotia]

Thank you, Mr. Chair and honourable members.

I'm a representative and a board member of the Urban Development Institute. My name is David Graham. I'm also a developer in Halifax.

The Urban Development Institute board represents predominantly land, rental, condo, home, or building developers. In Halifax, we have experienced a decrease in the sale of new homes, single family homes, and detached homes over the course of the last four years. What had predominantly been a market of a thousand homes a year has decreased to a low in 2015 of 425 homes. This past year it was 550. It might caused by a variety of reasons. One of these is that we have an aging baby boomer population that's moving into rental accommodation. We also have immigrants who are coming in and moving into rental accommodation. As well, millennials, at this point, can't seem to get into the market in the way they would like to.

I think it's worth noting that 45% of the resale transactions in Halifax are for less than $250,000, and 75% of the housing resale transactions in Halifax are for less than $350,000. I emphasize that number because we're not Vancouver and we're not Toronto, and we don't want to have regulations imposed upon us that might be partly or entirely geared towards correcting a housing bubble in both Vancouver and Toronto.

To that end, we'd like the finance department to acknowledge or appreciate—and I'm sure it does—the very diverse and different markets that exist across the country.

While there are imbalances in the Canadian housing market, Halifax is a very stable market. It relies on first-time homebuyers to get into the market so as to generate a second round of home purchases, and in time, a third round and so on. Decreases in the number of first-time homebuyers in the market have a negative effect that will exacerbate a market that CMHC already categorizes as weak.

Because we believe that we have a balanced market, if the finance department is concerned about certain markets—and I emphasize Vancouver and Toronto—one way to avoid painting the secondary markets with that broad brush might be to properly apply regulations on home prices. Namely, we could potentially have a tiered system. We recommend that the finance department consider a tiered system in which the stress tests and new mortgage rules wouldn't apply to homes that are under a certain value—$350,000, for the sake of the argument. Such a policy would not be detrimental to markets that are currently in balance, which are predominantly secondary markets.

I will point out that the National Housing Act was expanded in 1954 to make home ownership more accessible to Canadians. New rules and modifications consistently reinforce this objective over time. In 1999, the National Housing Act and CMHC introduced a 5% down payment plan, removing a significant barrier for first-time homebuyers.

I will now draw on a hypothetical scenario. If defaults represented 0.5% of the market and we wanted first-time homebuyers to start asset accumulation at a young age in these low interest rate environments, then hypothetically, out of every 200 mortgages that would be recorded, 199 people would have the opportunity to be in asset accumulation at this time of historically low interest rates. One person would default.

We would like to ask the following questions to the finance department, if you would be kind enough to supply them for us: Can you provide more evidence on how you arrived at your conclusions to put new mortgage rules in place? Does data exist that follows the success—or the failure, as the case may be—of the initiative contained in the National Housing Act regulations of 1999 to have a 5% down payment plan? Is there data that can be used to compare any notable change in default rates as a result of this initiative or, conversely, the number of first-time homebuyers this initiative was able to get into home ownership?

Finally, in the context of getting first-time homebuyers into asset accumulation in the form of housing, have you modelled the consequences that come with the number of first-time homebuyers who are not able to buy a home and what their alternative spending habits are in the absence of such a forced savings plan?

Thank you for your time.

[The Chair, Liberal, Wayne Easter]

Thank you very much, David.

We do have officials coming before the committee on Monday. You can look at the record then and see who will win the star from the committee members here who asked that question.

Right, Mr. Deltell?

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Sure.

[The Chair, Liberal, Wayne Easter]

We turn now to Mr. Fergus for five minutes.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much, Mr. Chair.

I would like to thank all the witnesses who are with us today. I found their presentations very interesting and they caught my attention.

Before I ask some questions, I would like to make a comment.

My colleagues from the official opposition, who claim to be staunch defenders of the middle class, have voted against a number of measures designed to reduce taxes and to help families—

[The Chair, Liberal, Wayne Easter]

Greg—

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I know, Mr. Chair, I am off topic.

[The Chair, Liberal, Wayne Easter]

—we went down this line in the first round, first with Mr. Deltell, then with Mr. Sorbara. We're not going down this line again.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I could not help myself, Mr. Chair. I am sorry.

My question goes to Mrs. Guy and Mr. Cardinal.

When my wife and I were young, when we were new university graduates starting our first jobs, we bought a house with a 25% down payment, as was the rule in 1995. We looked at the real estate market and we said to ourselves that, although our salaries were not very high, we could take out a normal mortgage, one that was not insured. After looking at our financial situation, we chose to be renters no longer and to buy a house.

I fully understand that it is important to provide easy access to first-time buyers, but I have to ask the following question. Is it a good thing for people to become owners when they are perhaps in a more precarious financial situation than was the case 5, 10 or 15 years ago?

[Paul Cardinal]

Thank you for the question, Mr. Fergus.

In terms of what borrowers are able to do, a lot of things have happened in the last few years. Mortgages have been tightened six times in the last eight years. When borrowers show a good ability to pay and have a good credit history, the minimum down payment of 5% certainly seems to be something that, up to now, has allowed people to buy a home without finding themselves in default. In cases of default, the first determinant is, of course, the ability to pay that comes from employment. There is the credit history too.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I imagine that it is preferable for borrowers to be much more stable and more able to sustain the external factors that can suddenly occur, such as a sharp rise in interest rates, for example.

[Paul Cardinal]

It is preferable, but, on the other hand, if the criteria required to buy a first-time home are too hard to meet, people are prevented from owning a home.

That is quite easy to demonstrate. According to the data that we have for the last 35 years, because of the forced savings and the appreciation of their property over time, those who have become owners have improved their financial situation much more than those who have remained as renters.