Finance Committee on Feb. 13th, 2017

[The Chair, Liberal, Wayne Easter]

This afternoon we have two sessions, the first being on the study of the Canadian real estate market and home ownership.

In the first hour, we have the president and chief executive officer of the Canada Mortgage and Housing Corporation, Mr. Siddall. With him are two senior vice-presidents, Mr. Tremblay and Mr. Mennill.

Mr. Siddall, I believe you have a brief opening statement. We'll go from there.

[Evan Siddall, President and Chief Executive Officer, Canada Mortgage and Housing Corporation]

Thank you, Mr. Chair.

It’s a pleasure to be here. I want to thank the committee for rescheduling my appearance after I was unable to attend the session on January 30. Unfortunately, my daughter suddenly fell very ill and I had to take care of her.

Mr. Tremblay, the senior vice-president of policy, research and public affairs, spoke on my behalf at that session. He joins me again today. He is to my left, and Steve Mennill, senior vice-president of Insurance, is to my right.

Rather than repeating what Mr. Tremblay said two weeks ago, I’d like to respond to some of the testimony provided by other people.

First, I want to clarify CMHC’s role in the housing finance sector in relation to the role of other federal departments and agencies, in particular the Department of Finance.

Contrary to some testimony, CMHC does not in fact set the rules for mortgage loan insurance. This is the purview of the Minister of Finance.

As the Government of Canada's adviser on housing policy, however, we advise the minister on potential changes and their implications for financial stability and Canadian housing markets. More often than not, our advice and analysis are provided confidentially. Given that housing finance policy decisions can affect the marketplace, this function is managed separately from our commercial functions, and broad consultations on these changes are not always appropriate.

We also support the deputy minister of finance's senior advisory committee with regard to housing issues. This committee is a discussion forum for financial sector policy issues, including financial stability and systemic vulnerabilities.

Let me turn now to just a few issues that have been raised directly with the committee by prior testimony.

Some witnesses have expressed concern about the changes in mortgage loan insurance rules announced by Minister Morneau on October 3. I can confirm that we did in fact provide policy advice to the minister and Department of Finance officials on these changes, and that we fully support them as they contribute to the sustainability of Canadian economic growth.

The committee has also heard that the October 3 changes had a negative impact on first-time homebuyers and on some industry participants who experienced some disruption in their business models. There has been some suggestion that the changes had unintended consequences.

However, as I noted in a commentary piece published in The Globe and Mail on October 17, in fact the results of these policy changes were fully intended. We did expect lower levels of competition in certain areas, as well as a modest increase in mortgage rates, and we did understand how the changes would impact first-time homebuyers' ability to borrow.

With regard to competition, we need to make sure that measures to support competition promote financial stability. Good public policy involves making balanced and measured trade-offs between differing objectives. In our judgment the mortgage insurance regime was providing undesirable stimulus in the marketplace, so indeed we sought to remove distortion, not to add distortion.

We also felt that action was needed to address the level of household indebtedness in Canada, which is now at a historic high of 167% of disposable income. The Bank of Canada calls this factor the greatest vulnerability to our economic outlook.

Highly-indebted borrowers are more likely to be young first-time homebuyers. With potentially less employment experience as a result of their age, they would also be at a higher risk of losing their jobs in the event of a downturn. In short, they're a vulnerable group of Canadians who would suffer financial hardship should the economy take a turn for the worse or should interest rates rise significantly.

Given what we know about wealth effects and financial acceleration, should a weakening of the economy come to pass, their financial troubles could have spillover effects for the economy at large.

It's important to note that the October 3 changes were not targeted at escalating house prices in the greater Toronto and Vancouver markets, as suggested by some witnesses. In fact, our objective was to avoid negative long-term consequences to the Canadian economy as a whole.

At CMHC, we have signalled strong evidence of problematic conditions in the Canadian housing market as a whole for several months now. It's true, Toronto and Vancouver have higher levels of indebtedness and thus will be more affected by the changes, but as the Bank of Canada noted in its December financial system review, the proportion of highly indebted households has continued to rise in many cities, and this is a problem across the country.

The stress test imposed on borrowers ensures that they could withstand an increase in interest rates. This will impact only borrowers who are or would be highly indebted following the purchase of their house regardless of where they live. The resulting delay in when some individuals can purchase their first home or the decision to buy a smaller home, or to rent, or stay put is a necessary trade-off to ensure economic growth and continued financial stability for all Canadians.

As it is, through nearly $1 trillion in mortgage insurance guarantees, the homebuyers' plan, and other federal and provincial programs, we believe substantial support already exists for first-time homebuyers. It is possible to have too much of a good thing.

I can assure the committee that CMHC continues to closely monitor housing markets across the country, and we continue to offer the government expert advice based on our research and analysis both to facilitate access to housing and to contribute to financial stability.

Thank you again for the opportunity to speak to you today.

My colleagues and I would be pleased to answer your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Siddall, for what was a direct and to-the-point submission.

We'll turn to the first round. We can get everybody in if we go with the first three questioners, one from each party, at seven minutes each, and the rest at five minutes.

Robert.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much, Mr. Chair.

Thank you very much, Mr. Siddall, for coming here today.

I had the opportunity of walking for about 900 kilometres visiting 41 first nation communities over the past 22 days, and in many of the communities I was very pleased to see that CMHC is actually building homes in partnership with the communities. Some of these communities have excellent housing.

I met young men, such as a guy named Moose, who was very proud of building new homes in his community, and I'm very proud of the commitment our government made on that. But I also found a lot of challenges are occurring, for instance, related to rent within communities. I can't say yet that there's a correlation—I'm going to have to go over my data and what I learned—but it seems that some communities require that rent be paid by people who are living in CMHC housing, and other communities do not, and at first glance there seemed to be a correlation with the long-term quality of that housing.

We can talk a bit about that, but also, just to get more information, what is CMHC doing in working with first nations communities on this file?

[Evan Siddall]

We share responsibility for housing on reserve with our colleagues at INAC. Currently we spend about $282 million—I'm just referring to my notes—to house first nations on reserve annually. Budget 2016 added an additional $554 million over two years, of which $138 million was directed to CMHC for renovation and retrofit programs. That was the bringing back of a program that was introduced some years ago.

That's the purview of our activity. CMHC's participation tends to be more market-oriented than that of INAC, which tends to be more deep support, but we share that responsibility with them.

I have visited a number of first nations communities—not 41. Every time I travel I try to do that, because it's a core part of our responsibility. People were surprised when I referred publicly to the status of housing on reserve as “abysmal”. That shouldn't be a controversial statement for a civil servant to make, and we definitely share your concern.

Part of the problem, of course, is a local political problem. There is a correlation between those communities that collect and enforce rent, and will actually evict people—and support people so that they can pay the rent—and the housing outcomes we observed in those communities versus others where that is not as enforced and there's less political courage, I would say, with respect to rent collection.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I was also wondering about capacity, because a lot of these are very small communities, some with 500 or 1,000 people. I found sometimes that individuals in a three-year period would have up to five housing directors move in and out, according to the circumstances of life and employment. Obviously, that has an impact on capacity.

What are you doing to work with those communities to build that capacity so they can actually fill out the proper forms in order to obtain the housing they have a right to? I found some communities were very successful in obtaining housing. In others, it had been a few years since they had been able to obtain it because they were missing deadlines, or someone was missing in action somewhere.

I was just wondering what you're doing.

[Evan Siddall]

Capacity building is an important part of our mandate. We reserve monies each year to invest in that. If you take communities of 50, 200, or even 1,000 people and put them in remote locations where there isn't much economic activity, capacity will be a problem. That's the situation that faces many first nations communities, as members will know.

We deliver housing through us and INAC through different programs. It's very confusing, and the amount of turnover in those jobs, frankly, hasn't made it easier. We're working with INAC, Indigenous and Northern Affairs Canada, to try to work in a more client service-oriented way so that we help these individuals. In addition, our own consultants at CMHC spend a great deal of time assisting in developing capacity, in promoting educational training, and with rent collection programs for housing managers on reserve as well.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Do you think there would be an impact if, instead of having one small community trying to be everything to everyone, they in fact were to share the capacity among many different first nations? One community seemed to be really good at housing, and another was really good at education—I know you can't comment on the education side. Some were seen to be excellent at water management and water sustainability, and others in environment and economic development.

Perhaps that one community that was excellent in housing should.... Is there a way of ensuring they can share their capacity with other first nations so that we don't see just one moving ahead so far and everyone else staying behind or falling behind in terms of the quality of their housing, which leads to health outcomes and all sorts of other issues that we know occur? Is there a way we could manage that or create a different way of thinking about the system?

[Evan Siddall]

I won't talk about education other than to say we know that better housing is positively correlated with better education and health outcomes for children and people. There is a correlation, and we take that responsibility on.

In fact, a collection of expertise in a regional housing authority or a community housing authority among neighbouring first nations is a way to deal with that. It sometimes requires collaboration and co-operation among people who want to have their own responsibility. We've talked to first nations communities about doing exactly that. I think it would be a wise development.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

That's something very hard to do, because often people are very protective of what they know and what they have. We want those jobs in our own community. If someone is doing it in another community, even though they might be very good at it, I think that, politically, we become very fearful.

[Evan Siddall]

A whole-of-government approach where we help to sponsor that shared expertise in communities wouldn't have to be a zero-sum game, would it? You could have people from one community performing one function, and people from another community performing a different function for the group. That's, I guess, a possibility.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I like that, zero-sum game.

One final thing, just moving on, what's the involvement with CMHC in “Housing First” strategies for homelessness?

[Evan Siddall]

Housing First is the responsibility of our colleagues at Employment and Social Development Canada, ESDC, also under the purview of Minister Duclos. We coordinate with them on the homelessness partnering strategy and Housing First, but homelessness per se is ESDC's responsibility.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Okay.

[The Chair, Liberal, Wayne Easter]

Robert, we'll have to end there. That's it. I'm sorry.

Mr. Albas.

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

Thank you, Mr. Chair.

Thank you to our guests for being here today. I certainly appreciate your coming and giving the committee a bit of a better understanding of your opinion.

Some of the best advice I ever received was to think of people, not for them. When I read this, it sounds as if your agency is thinking for people. You said, “Action was needed to address the level of household indebtedness in Canada, which is now at a historic high of 167%”. That is probably true, but it doesn't necessarily address housing debt.

We've had witness after witness come and say that when someone can get into the market.... Bear in mind that many people of the baby boom generation came in at double-digit interest rates. They did so because they felt, first, that a home gave them a place for their family, for safety; and second, it allowed them to put away money into forced savings, so to speak, and it allowed them to have the privilege of home ownership, which I think is important.

I think what you're doing here with your comments is somewhat construing the situation to sound as if it is all mortgage debt that is causing the problem, but we've heard very clearly that access to credit card debt, access to financing loans for cars or for other non-durable goods, unlike a home, is an issue.

When you say, “Highly-indebted borrowers are more likely to be younger, first-time homebuyers”, are you not also saying that when people finally get into market, they're going to be older and they're going to be kept out of the market for longer? I'm just trying to get a sense of where you're going with this.

[Evan Siddall]

In Canada, we have among the highest home ownership rates in the world, at about 69%. Indeed, as you suggest, home ownership is well correlated with various social outcomes, including forced savings, retirement wealth, etc.

We took as quite instructive the research being done by the Bank of Canada that the number of people who had very high credit scores and were entering the housing market had grown from 4% of people who were indebted to 8%.

First-time homebuyers in particular tend to be substantially.... I think they have 90% plus mortgage debt as opposed to other sources of debt because they're quite stressed. We were concerned about their ability to afford their homes. I don't think we were thinking for them, with respect; I think we were very much thinking of them.

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

I would disagree. When someone is young, most of the time they have some education debt that they have to pay off for school, but when they're buying a home, it's usually because they're on a path. They might get a promotion, etc.

Also, the baby boom generation got into the market knowing what the risks were and made sure they could make those payments, even when they were dealing with double-digit interest rates. Again, I think the policy somewhat smacks of the nanny state.

What evidence does CMHC have that supports your contention that portfolio insurance has distortionary effects that are stimulating excess credit and contributing to higher levels of household debt?

[Evan Siddall]

There were a number of business models that were substantially based, for example, on refinancing. I gather some testimony has referred to refinancing as something that has been lost.

I want to distinguish between renewal and refinancing. If an individual comes to the end of their mortgage term and seeks to renew, they can still do that. That's freely within the programs that we have in homeowner transactional insurance and portfolio insurance.

Refinancing is where somebody goes to a bank and wants to borrow money and increase the amount of indebtedness of their home. Our contention is that's not a housing need that we think CMHC exists to provide. That is a housing want, and that can be provided and still is freely available in the public markets. However, to the extent that there's government support for it, that didn't strike us as something that the government should be supporting.

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

I'll cite someone who needs to renew and they're at the end of five years. They often have the equity already to be able to pass...because they've hit that five-year period. Again, part of refinancing allows for people to be able to invest in their small business. It allows them in some cases to survive a lockout or a strike. It sometimes will allow them to be able to purchase a home from a spouse because of a divorce. I think it's a little short-sighted for us not to look at those.

What evidence of risk was present to eliminate portfolio insurance on refinancing rentals when there was a delinquency factor of 0.24 of 8% in the current portfolio?

[Evan Siddall]

The evidence is in economic crises throughout history. Of the 46 financial crises for which we have data, the overwhelming majority of those, 70%, were preceded by housing boom-and-bust cycles. There's a book called House of Debt, by Atif Mian and Amir Sufi, and they say it is as definitive a relationship as exists in macroeconomics.

We were jeopardizing the economic future of Canada by promoting an economic cycle in housing markets that could result in a crash and could result in unemployment for people.

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

You're quoting from a book's economic model as your evidence.

[Evan Siddall]

You asked me for evidence.

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

We just had the financial crisis of 2007-08 and post-recession. We have Alberta, for example. Alberta has been weathering a significant economic downturn, and that is without a housing collapse.

What do you say when you're faced with the actual practical situation that we just had a major stress test in 2007-08 and we have continued to see a weathering where Albertans are doing what it takes to be able to keep their homes?

[Evan Siddall]

We don't believe we've been tested in our system in Canada. I wouldn't suggest that the financial crisis as it applied in Canada was a true stress test.

We publish stress tests that are far more aggressive than that, and, with respect to oil price declines, far uglier than we've experienced recently in Alberta. I would suggest that a single-digit decline in house prices is not a crisis.