Finance Committee on Feb. 13th, 2017

[Rob Stewart]

I just wanted to note, as has been noted by the Bank of Canada in its financial system review, that the level of vulnerability is rising rapidly and the number of borrowers who have levels of loan-to-income of over 450% has increased significantly across the country, particularly in the markets of Toronto and Vancouver. In supplement to the answer that was provided, it is an issue across the country, but it is also an important issue in those markets.

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

Thank you.

Just following up on that point in terms of lender support, ultimately if.... The competition is good. I don't think anyone is denying that fact. However, with the level of investment that Canada makes to allow for this competition through backing that insurance, as one example, changes or people's inability to pay, because sometimes those are the higher-risk individuals we're looking at there.... What would be the impact of the government's investment and Canadians' investment, in your opinion, if we didn't take these market risks and this debt load risk very seriously?

I think the earlier testimony pointed to maybe trying to ensure that there isn't too much of a good thing in terms of allowing too much debt to accumulate without really looking at the fact that, if we don't cool it off a little bit, people will out-borrow what they can afford with any market changes.

Do you see the risk to the overall investment as the real cause of concern if we don't protect and put these moderate tests in place to ensure people really can absorb those market changes?

[Rob Stewart]

When we think about stability risks, we think about them from two perspectives: the perspective of the system, which is largely the institutions that provide the loan and their stability, and also the borrower vulnerability.

In this case, we were looking very much at the borrowers of the equation. The system is stable, but there is a segment of borrowers at great risk. You could look at all of the changes that we've made in mortgage insurance policy over the last seven or eight years as reining in the capacity of borrowers to take excessive risk.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Aboultaif.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you.

The question is to the parliamentary secretary.

I gather from your opening statement that somehow the policies that have been pushed forward left a lot of consequences for small builders, for credit unions, for small lenders, and for overall big industry in Canada, other than in Toronto and Vancouver.

You mentioned the national housing strategy. As I gather from what you've said, those policies are going to encourage the government to have a national housing strategy. Any expert looking at it can see that the government is going to replace those industries, that they are in business and are going to really take that national strategy to start to be in competition with these interests, which is really against the free market, against the encouragement of small business owners, and in the meantime is going to cause a lot of loss of job opportunities and put a lot of doubts in the market.

Did I gather right from what you said or not?

[Ginette Petitpas Taylor, Liberal, Moncton—Riverview—Dieppe, NB]

Perhaps I didn't understand your question appropriately, but the national housing strategy is put in place in order to allow vulnerable Canadians to enter the housing market. That's really and truly what we envision with respect to the national housing strategy.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

With the national housing strategy, you're talking about affordability. How can that happen?

You also talk about protection of investment. How can we protect people's investments if we're not allowing them to invest because they are no longer able to do so?

[Ginette Petitpas Taylor, Liberal, Moncton—Riverview—Dieppe, NB]

Canadians are still able to invest if they choose to. We are simply putting some measures in place to make sure that we are able to support a healthy, stable, and competitive housing market. That's really what this is all about.

As indicated earlier, perhaps some homebuyers won't be able to buy that high-end home that they wanted, but it doesn't mean that they won't be able to enter the market. We simply want to make sure that their borrowing vulnerability is managed.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

But the measures that have been taken are not allowing many Canadians to enter the market as first-time homebuyers.

The opposite is what you're saying. Yes, in theory you're talking about encouraging, but in reality the policy out there is not going to allow those people to enter the market. How can you justify that?

[Rob Stewart]

To be clear with respect to first-time homebuyers and the interest rate stress test, what we've done is we've extended the test from a segment of the market where it had already existed. It had already been in place for borrowing under five years; now it's in place for mortgages with five-year terms and over. It has a transitional effect where first-time homebuyers, who were previously qualifying at very low five-year contract rates, will no longer qualify.

We see that as a transitional effect and we see it as being subject to changes in consumer behaviours. There's the possibility here that a first-time homebuyer, who does not qualify for the size of home they wanted to buy previously, will buy a smaller home or save.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Based on your data, and based on your information that you're not going to release because of confidentiality and maybe the effect it is going to leave on investment in the market overall, when do you see that it will be enough, that the policy will no longer be viable, and that maybe the government should retract and kind of open it again for people to join as first-time homebuyers from the middle class? How do you see that's going to happen in a timely fashion?

[Rob Stewart]

I don't know if I could answer the question of when, but I could answer the question “under what circumstances”.

Obviously we've taken these measures over a series of years, in the last year two times, to address circumstances arising from a low interest rate environment. An ability to borrow and a consumer's interest in borrowing to buy a house have been very high. That has pushed up house prices. It has pushed up people's interest in buying houses.

These measures have been taken in general, as I've mentioned, to make sure that when they enter into those arrangements, they're not vulnerable to either a loss of income or interest rate rises over time.

In other circumstances, for instance, where the economy is performing well but risks are lower, interest rates are higher, and the impediments to people making imprudent borrowing decisions are higher, we would perhaps look at circumstances in which we would change some of those rules. These are macroprudential rules, and they are adjustable.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

Mr. Fergus.

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

Thank you very much, Mr. Chair.

First of all, thank you, Madam Petitpas Taylor, Mr. Stewart, and Ms. Leach. I really appreciate your being here.

I have two quick questions. The first is that we've heard from stakeholders and from the opposition, my hon. members across the way, about the consultations. We heard you point to commercial sensitivities and why we can't have public consultations on specific housing measures. Is there any feature of the housing measures that differed compared with consultations that occurred in the past, especially under other governments, let's say, from the housing crisis in 2008 until now?

[Rob Stewart]

Could you clarify? Is there any feature...?

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

I mean in terms of the public consultations that you've had on issues that would affect the housing market, how did the changes of October 3 differ in a qualitative way that wouldn't have allowed you to do any preconsultations with the industry?

[Rob Stewart]

Yes, by all means. The changes to eligibility for mortgage insurance will have an impact on the marketplace, on the structure of the marketplace, on who gets access to mortgage insurance, and therefore, how easily credit can be extended.

We announce them in a transparent and immediate way to avoid any gaming of the market, anybody pulling forward house prices and house sales. I would refer you, for instance, to the B.C. foreign buyer tax, which saw a big surge of house sales in late July, as an example of where a delayed kind of impact can bring demand forward.

It doesn't apply in all circumstances. There are other places where we are consulting and have consulted. We have made some changes to rules around eligibility for portfolio insurance where we've had regulatory processes that have allowed public comment after the regulations have been published. We've also had informal consultations on a number of fronts, including one that is ongoing right now about the question of whether lender risk sharing would be a good idea.

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

I'm sorry...?

[Rob Stewart]

It's about the question of whether sharing risks with lenders would be a good idea, and they are very open processes with access to documents.

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

Thank you for that. I do appreciate that, and especially for getting that on the record.

The second question I have has to do with the witness testimony from CMHC, from Mr. Siddall. The measures that were taken on October 3 were measures that seemed to me would try to mitigate the risk of what Alan Greenspan called back in the 1990s the “irrational exuberance” of the market.

Do you feel that these measures are accomplishing that goal? What type of data would you need to reassure you that you've met that goal and that other policy tools would or would not be needed?

[Rob Stewart]

It's too early to say what the impact of these measures is. Some of them just came into effect at the end of November. We are actively monitoring those impacts, collecting data from lenders and mortgage insurers, and trying to understand how that's changing.

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

Because I have a short period of time, I'm going to ask you to quickly elaborate on that front. Some of the witnesses who were here felt, or seemed to present, that they had hard data, but your professional opinion is that it's too early to tell.

[Rob Stewart]

It is too early to say with any degree of confidence that we know exactly how this is going to play out.

There has been a short-term effect. It is clear that it has in some circumstances.... As one would expect, fewer first-time homebuyers are qualifying for a five-year rate, but how this affects the overall demand for mortgages remains to be seen. Also, as you know, we've done this at a period in time when the mortgage market is actually quite slow, so we'll have to see how things play out over the spring.

[The Chair, Liberal, Wayne Easter]

We'll end it there. Thanks to both of you.

Mr. Albas.