Finance Committee on Sept. 28th, 2023

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Dzerowicz.

Members and witnesses, we're moving into our third round and we're starting with MP Hallan for five minutes.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Thank you, Chair. Thanks to the witnesses for being here.

My first question is in relation to the IMF announcement that Canada not only has the most indebted households in the world but also has a real risk of a mortgage default crisis.

We know through the Governor of the Bank of Canada that government deficits make it harder to fight inflation. We also know through the current finance minister that deficits fuel inflation, which makes interest rates go up. We've seen inflation go up again, up to 4%, double the rate it should be currently. That could have another impact in the form of another interest rate hike.

I'd like to have both the Department of Finance and CMHC give their thoughts on this looming crisis, which seems as though it's going to be massive.

[Bob Dugan]

I can start. I'm Bob Dugan from CMHC.

You bring up some concerns that we share and things that we monitor very closely, in particular with respect to household debt.

We keep an eye on that because Canadian households do have a very high level of debt compared to those in many other countries. That is a vulnerability that can make us more susceptible to a downturn, so if some sort of shock leads to higher unemployment in Canada, the fact that we have a lot of household debt can make that downturn a lot more severe in Canada than it would be if household debt were lower. That's a concern we always share.

Luckily, with respect to mortgage defaults, so far arrears rates remain very low. I think the latest number is about 0.25%.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

It's there, but we haven't really seen the full picture yet, because some of those renewals are going to start now, and in some cases, the new rate people are going to be paying will be double or triple what they were paying, which is why the IMF has identified this as a default crisis.

[Bob Dugan]

Yes.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

If we're looking forward, isn't that factor a bigger concern?

[Bob Dugan]

Thank you very much for the question. I was just about to get there.

With the interest rates, the Bank of Canada has tightened from about a quarter of a per cent as of March 2022. They've now tightened up to 5% in terms of their policy rates, with the risk that those could go higher, for sure, if inflation persists. These are things that are going to lead to, and have already led to, increases in variable interest rates on mortgages, with people reaching their trigger rates and having to either face higher payments or get behind on their amortization.

Eventually that's going to lead to a reset of mortgage payments that could be more difficult for many households. Luckily, the mortgage rate stress test was in place, which protected against some of that increase, so most households that got a mortgage in the last four or five years—I don't know the exact start date—have had to qualify at a rate that's about 200 or more basis points above the contract rate—

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Fair enough, and I'd like to get Finance Canada's thoughts on this too, but we're not looking at just a 5% increase. The rates that banks charge for variable rate mortgages could be up to 6% or 7%.

When people go to renew, putting the stress test aside, what's going to happen to those who won't be able to renew? What's that going to do to the market? What's that going to do to our economy?

[Bob Dugan]

It's certainly a risk. A lot of these households are going to have to dedicate more of their income to paying those debt service costs.

I've been answering this, so I don't know if the Department of Finance wants to weigh in with anything on that.

[Julie Turcotte, Acting Assistant Deputy Minister, Economic Policy Branch, Department of Finance]

Thank you for your question. I'm Julie Turcotte from the Department of Finance.

It's true that many households are going to face some financial pressure in the coming years as they renew their mortgages. What we know is that so far, one-third of households have seen their mortgage payments go up, and that will increase in the next year or two to about two-thirds.

I think there are some mitigating factors, including that the labour market has remained quite strong, so we haven't seen unemployment increasing by a whole lot, and income growth is also quite solid—

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

I'm sorry. I wanted to get in one more question for both of you before I end.

My question is on how we recently found out that the government has lost track of a million people. There's no surprise, but is there any change in your opinion on what that would do to the supply and demand sides of this housing crisis we're in?

[Bob Dugan]

I believe we were talking about that a bit earlier in terms of the recent numbers and what that does to our projection of supply gaps between now and 2030.

Time permitting, I think what we committed to do is to try to see if we could come up with an estimate of how that might change our estimate of the supply gap.

We do have a high population growth scenario that results in a supply gap of about four million units by 2030, which compares to our three and a half million units in our base case scenario. I guess the question under these assumptions of higher population is whether the estimate would go above even four million. I don't have an answer for that right now, but it's something that we can try to look into.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Could you table that, please?

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Hallan. We'll go to MP Sorbara.

Welcome, MP Sorbara, to the committee.

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

Thank you, Chair. It's great to be with my esteemed colleagues.

Welcome to all of the CMHC officials today.

Mr. Dugan, thank you for your frank assessment of the Canadian housing market. You've been an economist at CMHC for a very long time. You've seen what I would call a few housing cycles. On where we are now, if you had to define it, where would you characterize we are in the housing cycle in Canada?

[Bob Dugan]

That's a great question about where we are in the cycle right now.

We're in an environment where interest rates have come up, of course, and that's been dampening housing demand, especially home ownership demand. In the past year or so, obviously, since interest rates have come up, we've seen a bit of downward pressure on house prices. That doesn't mean that housing is more affordable, because with the rise in interest rates, mortgage carrying costs have been higher.

In terms of the housing cycle, what worries me is that in the short term, with higher interest rates, we might see less robust housing market conditions than we saw, say, before interest rates came up, but in the longer term, my bigger concern is that because of the lack of supply, the long-term trend in housing markets is for a deterioration in affordability as rents and prices continue to increase.

In the short term, there could be some relief because of short-term cyclicality, but in the long run I really worry about affordability and price increases because of the lack of supply.

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

If I can add to that, a normalization of rates has happened and is happening on yields on both sides of the border at whatever part of the curve you want to look at. I think that's why there was the announcement yesterday or the day before to increase the size of the CMB program to be very liquid. I think the number was some $200 billion, backed by Canada's AAA credit rating, with very good assets behind it, to incrementally build another 30,000 units, I believe it was, in rentals. It was very significant

On top of that, there's the lifting of the 5% GST. Some of the provinces have come on board to remove the HST portion, so you're not just getting the 5% uplift; you're actually getting up to the double digits, which is great.

I think the gap between supply and demand that exists right now is just a stock-and-flow number, right? We have a stock of housing, and it takes time to build, but we have a flow of demand that we're trying to catch up on. Can we catch up?

[Bob Dugan]

That's a great question.

I have to believe that we will eventually, with all the efforts that are being made, but it's going to be a challenge, and I think it will be really big challenge to build the three and a half million units by 2030. I think I've said that.

I don't know, Aled, if you want to add to that in any way. It's a hard goal to achieve.

[Aled ab Iorwerth]

I think the one encouraging sign is that now, after these recent reports, everybody is starting to talk about supply. Supply is getting the focus and the attention, and we think this is where the solution lies.

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

If I can, I'll just add another tangent. At this moment in time, there are more cranes in the city of Toronto than in any other North American city. Actually, you can combine a couple of North American cities, and they still wouldn't reach that. In my area, in the city of Vaughan, an area where the subway has gone to, we've gone from a population of zero to where there will be 40,000 within the next couple of years. There are cranes everywhere as it's being built.

I want to do a shout-out to the builders out there and to all of the workers that are building everything across this country, whether they're skilled trades from Local 183 or Local 506, the carpenters in the IBEW or all the folks in between. They are the folks who are going to have to build this, and they actually do it quite efficiently. Great products are put out to the market for Canadians on the entire housing continuum, from affordable housing down to selling a detached home in the Canadian markets.

How much time do I have left, Mr. Chair?

[The Chair, Liberal, Peter Fonseca]

You have one minute.

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

Okay.

The first-time homebuyer account that was mandated has seen great pickup. It is a demand-side function, but in the longer term I think it's a....

Do we have any statistics on how many Canadians have opened that account?

[Miodrag Jovanovic]

I don't believe we necessarily have numbers now. Probably it may take a bit of time to have that understanding of what institutions are offering. I can take that with me and see if there's a way to get some information on this aspect.

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

Thank you, Mr. Chair. I'll stop there.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Sorbara.

Now, we will go to MP Ste-Marie, please, for two and a half minutes.