Finance Committee on Jan. 21st, 2022

[Romy Bowers]

To repeat my previous answer, Generation Squeeze's proposal was to study generational wealth inequality. It was not to study the capital gains tax issue specifically. Perhaps I was not clear on that, but I'd just like to state that their study was quite broad, and they chose, as part of the solution, to focus on tax for an aspect of their response.

[Greg McLean, Conservative, Calgary Centre, AB]

Okay. Thank you very much, but they have no expertise in anything outside of generational taxation, so can you tell me the process and how they were vetted to get this contract? I ask because really, if I can talk to some professors at the University of Calgary and Mount Royal University and say “There's $250,000 sitting here for you to recycle one of your theses through the Canadian Mortgage and Housing Corporation”.... Is that really the process?

[Romy Bowers]

With respect to our solutions labs, there is a competitive process. We provide a lot of transparency about the application process and the ways in which proponents can submit their ideas. We have an internal committee that reviews all the applications, ranks them and grants the money to successful applicants.

[Greg McLean, Conservative, Calgary Centre, AB]

Okay. Thank you.

I'm going to turn to Mr. Routledge.

Mr. Routledge, over the last couple of years since this government was elected, the average price of a typical Canadian house has gone up from $434,000 to about $811,000. That's approximately 85% inflation over the six years this government has been in power. Last year, home inflation hit 25%. The Canadian Real Estate Association said this is the “biggest gain of all time”.

Can we talk about that? As you know from financial markets, what goes up must come down. Can you please tell us what you think has caused this rapid increase in housing prices and if it has anything to do with the gross amounts of federal money pumped into the financial system?

[Peter Routledge]

Mr. Chair, on the first thing, just for a financial stability perspective on the question, we have seen ups and downs in local housing markets and we have not seen the disruptive situations that we saw in other countries, so the buffers that we've put in place worked then and are stronger now.

With respect to the drive-up in prices, there is a multivariate explanation. Certainly, one of the explanations is lower interest rates. If you lower the price of something—in this case, residential mortgage credit—demand tends to go up. Other factors are this persistent supply/demand mismatch, which does put a bit of an underlying floor under price and gives investors or “speculators” some confidence to come in. That is perhaps why we're seeing more speculators come in.

There is a multivariate explanation to your very fair question.

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you, Mr. Routledge, but I take a look at there being a whole bunch more money in the system, and yet a significantly greater portion of it is landing in residential real estate. Typically, it's between 5% and 8% of Canadian GDP, and now it's over 10% of Canadian GDP that's being invested in Canadian real estate, whereas if you take a look at Canadian business investment, in contrast, it is at an all-time low. We're really pushing money into the housing sector through this government's activities. Can you please comment on that?

[Peter Routledge]

Mr. Chair, Canada has been shifting more of its economy towards housing for a great many years. It hearkens back to really beyond the start of this century.

[Greg McLean, Conservative, Calgary Centre, AB]

Let me intervene, Mr. Routledge, as I have the data right in front of me. You can kind of see it. Before the pandemic, it was already at a high of around 7% of our economy—you're right—and now over 10% of our economy is being put into residential real estate. That's a drastic increase over the span of the last two years.

The other part of that, of course, is that the rest of the economy is not receiving investment. As a matter of fact, we're net negative if you subtract the depreciation of the capital stock in the country.

Why is this choice being made by Canadians?

[The Chair, Liberal, Peter Fonseca]

We're well past time, so we'll have a short answer of 10 seconds, please.

[Peter Routledge]

Mr. Chair, the banks have chosen to allocate their capital towards residential mortgage credit because the demand is there and it remains a very profitable, well-capitalized business.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. McLean.

We're moving now to the Liberals and Ms. Dzerowicz for five minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

Mr. Routledge, I'm going to start with you.

I know that Mr. Poilievre gave you a number of rapid-fire questions. Is there anything you might want to add or elaborate on in response to the series of questions he provided you with?

[Peter Routledge]

Mr. Chair, perhaps I'll go back to the question by the honourable member Mr. McLean.

In 2015 we had a fairly sizable correction in Vancouver housing—a double digit one. In 2017, following the 2016 boom, we had a similar one in Toronto, and certainly predating those, there were plenty of mortgages underwritten, and some of them were underwritten with low down payments. Through those events, mortgage insurers did not suffer disproportionate losses. Banks did not suffer disproportionate losses, and credit delinquencies remained remarkably low. The buffers that have been put in place, whether by the Office of the Superintendent of Financial Institutions or by other departments of the federal government, including CMHC, absorb the volatility in those cities, and I believe they will absorb and are adequate to absorbing volatility that may come.

I'm not complacent and I'm always asking where we can add more safety, but I am very confident that we have very strong buffers in place.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Routledge.

My next question is for Ms. Bowers.

During the pandemic—and we're now going into the second year—what has been the rate of mortgage defaults? Do you have a sense about that for us?

[Romy Bowers]

I can talk to you about CMHC's delinquencies. Our delinquencies have been below 0.3%. So they have been very, very low, and despite the fact that there has been an economic recession, we feel that in terms of delinquencies the mortgage market has been very robust.

That being said, at CMHC we take risk management very seriously and we do invest in significant stress-testing capabilities to make sure we have sufficient capital in place for any losses that we would incur.

[Julie Dzerowicz, Liberal, Davenport, ON]

To follow up on that, Ms. Bowers, in February 2020, just about a month before the pandemic started, our federal Minister of Finance at the time did change the minimum qualifying rate for insured mortgages.

To what extent did that change have an impact on the low level of mortgage defaults?

[Romy Bowers]

It was a change in what is called the “stress test”. It provides a little bit of an extra buffer for first-time homebuyers qualifying for mortgages, or a little bit of cushion in the system in the event of sudden changes in interest rates.

From a prudential perspective, we feel that that kind of change is good for the system.

[Julie Dzerowicz, Liberal, Davenport, ON]

I'm sorry, but my question was whether it had an impact on the low mortgage default rate.

[Romy Bowers]

My apologies—I was just coming to that question. In terms of losses, based on our stress testing and our experience, we find that losses in our mortgage book are caused by unemployment, not changes in interest rate. Therefore, I think the stress test may have indirectly contributed to the robustness of our mortgage book by having more stringent criteria, but I don't think there's a direct relationship between those two changes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you. It's interesting that employment is more of a direct factor in mortgage defaults. Thank you for that.

My last question is for Mr. Routledge.

I believe you made some comments, in your Vancouver speech, about looking at the minimum qualifying rate for uninsured mortgages. Can you comment on that? It must be very difficult in a time of instability. How are you looking at it from the perspective of making sure we're keeping in mind that we want first-time buyers to actually continue to buy houses?

[Peter Routledge]

Mr. Chair, the honourable member very aptly describes the trade-off we face. Over the last four years, we put the stress test in place and increased it so that the test borrowers face is higher than it was a few years ago. The implication is that it's harder for Canadians or that Canadians need higher income levels to meet the stress. We do that for a good reason. We do that so that if we have volatility and uncertainty in the housing market, there are those buffers at the individual level that come into effect and then allow Canadians who may be facing a bit of hardship to stay in their homes.

The price we pay is that as we raise the stress test, affordability—or not so much affordability, but access to credit—requires higher levels of income. We think about that a lot. We thought about that in December when we reconfirmed our stress test, which is the greater of 5.25% or the contract rate plus two per cent. Access to credit is not the only consideration but it's an important consideration.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Ms. Dzerowicz.

We're moving to the Bloc and Monsieur Ste-Marie for two and a half minutes.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Mr. Dugan, we are currently seeing an increase in the cost of rent. People who are renting seem to be paying higher rent. Rent has not gone up as much as real estate prices, but it certainly has gone up.

In your reports, do you see a cause and effect relationship between higher real estate prices and higher rents? Is it a major determining factor or is it more marginal? Is it supply and demand once again in this case?

[Bob Dugan]

Thank you for your question.

Of course, supply and demand has a lot to do with it.

All markets are connected in one way or another. When housing prices go up, some people can't afford to buy a property so they stay in the rental market. That results in greater demand for apartments, which puts downward pressure on vacancy rates and can put upward pressure on rents. Everything is connected and supply and demand certainly has an impact.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

All right, thank you.

I'd like to ask Ms. Bowers a question about something else.

In the last budget, the government announced an interest-free loan program for energy-efficient retrofits, to be administered by CMHC. Initially, the program was expected to launch last summer, then it was delayed to the fall, and now they are saying 2022.

Are you able to give us any information about it? When will the program be up and running?