Good morning and thank you very much for the introduction, sir.
I'd like to thank the finance committee for the opportunity to participate at today's hearing.
Canada Guaranty is a 100% Canadian-owned private mortgage default insurer competing against the government-owned CMHC and Sagen in the private sector, which is here today. Our core business is to provide mortgage insurance for Canadians who purchase a home with less than a 20% down payment; these are primarily first-time homebuyers.
Our business, the mortgage insurance business, is extremely pro-cyclical, and while we're currently at a point in the economic cycle that features improving unemployment rates, rising house prices and relatively low interest rates, I would point out that mortgage insurers are still seeing borrowers default from mortgages that were originated during the global financial crisis in 2007 to 2009, which reflects the long-tail nature of our business. The key tenet of our business is to ensure that we're there to provide stability to the financial sector when the economic cycle turns and the situation would be the opposite of what it is today, where we'd see elevated unemployment rates, high defaults and weakened house prices.
Our business is closely regulated by OSFI, which requires all mortgage insurers to hold appropriate capital levels to be able to withstand a significant and prolonged increase in mortgage defaults during a variety of stressed economic scenarios. Our industry's product offerings are also limited to a defined sandbox as determined by the Department of Finance.
These two key guardrails serve to strengthen and stabilize the Canadian mortgage insurance framework. Since the global financial crisis, there have been no less than 10 demand-side regulatory interventions that have reduced demand for mortgages. These include reducing amortization periods from 40 years to 25 years, eliminating high ratio rental mortgages, and eliminating mortgage refinances from the insured marketplace. As well, since 2017, all insured mortgages have had to qualify at a stress tested interest rate that is several points higher than the contract rate. This has served to create an important stability buffer to protect borrowers' ability to retain their payment ability when interest rates rise. At Canada Guaranty, we have supported all of these interventions as being prudent and necessary to support a sustainable and responsible home ownership market.
During the recent federal election, a variety of housing-related proposals were put forward by all parties. One platform related to arbitrarily reducing mortgage insurance premiums. I would point out to the committee that mortgage insurance premiums are derived from an actuarial analysis based on capital levels insurers are required to hold to retain claims payment capability during a variety of stress scenarios and economic downturns. Minimum capital levels are set by Canada’s federal regulator, OSFI, and are a key part of Canada’s financial stability. Arbitrarily reducing premiums without the appropriate actuarial analysis would be a concerning precedent and would weaken Canada’s housing finance system.
For the benefit of the committee, I'd like to take a moment to describe Canada’s typical first-time homebuyer. The average high ratio first-time homebuyer ranges in age from 25 to 40, has average household income in the $80,000 to $120,000 range and an average mortgage size of $390,000 with a very strong credit score of north of 750, which demonstrates a very high level of creditworthiness.
Insured mortgages overall represent a relatively small component of Canada's mortgage originations; we estimate that the insured segment represents less than 20% of the overall mortgage market. In addition, the insured market has a maximum $1-million purchase price cap, which was implemented in 2012 and has not been adjusted. This maximum cap of $1 million for a home purchase price is now a key factor in reduced accessibility for prospective first-time homebuyers in the greater Toronto area and greater Vancouver area, two key markets where over 50% of home purchases are over the $1-million cap.
I'd like to turn my comments to what I think is the core aspect of this committee, and that is the house price inflation. In recent years, house price inflation has made affordability increasingly difficult for many first-time homebuyers. Canadian house prices are up 15% over the past year and have increased by 26% over the last 24 months according to Teranet. Let me describe what we consider to be the most significant factors causing house price inflation in Canada, and we believe there are both supply and demand-side contributions.
The most important issue is the lack of timely housing supply. Many municipalities have seemingly constrained development and have been unable to create urban housing supply for prospective new home owners. Land use and zoning bylaws in many of Canada's key cities appear to be out of sync with Canada's immigration policy and growth aspiration. Canada has the strongest population growth of any G7 nation and our housing supply in many of our key cities has not been able to keep pace.
Housing supply has also been constrained by lack of homes for sale during a changing housing market dynamic, with buyer preferences triggered by the pandemic. Canadians are staying in their homes longer and are hesitant to move into assisted living centres. The pandemic has also significantly altered and slowed the pattern of international people movement, with Canadians seemingly more hesitant to pursue international employment opportunities.
On the demand side, over the last 18 to 24 months, we have observed three notable changes to domestic demand.