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.