Finance Committee on April 4th, 2022

[Andrew Charles]

Mr. Levings, do you want to go first?

[Stuart Levings]

Thank you.

The basic principle here is that the first-time buyer currently competes in the housing market against seasoned buyers, move-up buyers, and investors who often have more down payment availability because they are selling a home themselves that has a lot of equity built up in it. In addition, they have access to a 30-year amortization. Arguably they have more buying power and our view is that the insured buyer should be allowed to compete at least on an even playing field in that regard, which would mean a 30-year amortization be extended to them.

I think there is obviously merit in the fact that a 30-year amortization is somewhat inflationary in that it extends more buying power. But when you think about some of the comments we've made already to this committee on how big a role the first-time homebuyer plays, which we estimate is somewhere in the range of 15% to 20% of all mortgages, they're not really the inflationary force in the market. They're also buying homes that are on average a lot cheaper than the market averages.

Just to level the playing field, we've often thought that a 30-year amortization max would be appropriate in the insured buyer space. Currently it's limited to 25 years.

[Heath MacDonald, Liberal, Malpeque, PE]

How much time do I have, Chair?

[The Chair, Liberal, Peter Fonseca]

MP MacDonald, you have a minute and a half.

[Heath MacDonald, Liberal, Malpeque, PE]

Touching on that, you also mentioned buyers who were using the market for financial investments. Can you give me a little insight and your opinion on the impact of increasing financialization in the Canadian market and how that's affecting first homebuyers?

[Stuart Levings]

Certainly. I'll continue.

We have seen an uptick overall in the financialization aspect really represented through investors. This is data that we see externally, given that we are not able to insure investor property purchases. So we rely on external data. However, it is evident that speculation has increased, as it always does during times of very strong housing markets. We think there's an element of speculation by investors that is healthy because, in some cases, they do provide rental accommodation opportunities. In many other cases, it's more about making money out of the housing market and turning houses over, which is unhealthy in our view.

It's not something we can do anything about with first-time buyers or in the insurance space, given that we don't play in that space, but we definitely think that some of the measures we've seen already coming from various levels of government aimed at dampening down some of this speculation are good moves and should continue to get attention.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP MacDonald. That's the time.

We are moving to the Bloc and MP Ste-Marie for six minutes, please.

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

Thank you, Mr. Chair.

Good morning, gentlemen. Thank you for your attendance and for your presentations, which were very interesting.

My first question is for both Mr. Charles and Mr. Levings.

Owing to increasing prices, it appears that first-time homebuyers have less access to residential property. In light of that trend, would you say that your activity sector's role is decreasing or increasing? How does this impact your business?

Mr. Charles, you can answer the question first, if that's okay with you.

[Andrew Charles]

Thank you very much.

I would say that the larger issue for us, as house prices increase—and they've increased significantly—is the $1-million purchase price maximum, which restricts the mortgage default insurance from supporting first-time homebuyers' access in Canada's larger urban markets, where there's been a strong level of appreciation.

If I were to go back a decade ago, the percentage of insured volumes in Canada, as a proxy for first-time homebuyers, was closer to 40%. You see today that our role is really becoming much more narrow to about 15% to 20% at the high end, but likely closer to 15%. Our overall role, if you will, is starting to become more moderate because of that $1-million purchase-price maximum, sir.

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

Thank you.

Do you want to add anything, Mr. Levings?

[Stuart Levings]

Yes, certainly. I would add that what we witnessed over the last few years, and I'm sure it's the same for our competitors, is that the footprint where you see insured mortgages is moving further and further out of the major urban centres. While that's obviously where first-time homebuyers are going to buy, it's a negative for our industry and I think overall because you are seeing a move out of the more economically diverse centres where you want to be as mortgage insurers, because you need economic diversity, you need that strength for periods of downturns in the economy. If we end up being too concentrated outside of these major urban centres, you are going to see more volatility when tail risk occurs.

Back to the comments on the $1-million cap, which is the obvious headwind or ceiling that we're bumping up against and is preventing us from having more distribution or representation around the greater centres, that is something we think should be addressed to help prevent that.

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

Thank you both for your answers.

Do you have statistics for all mortgage financing for home purchases involving variable rates and fixed rates for one or two years?

We obviously have concerns about the market's stability. The key policy rate is expected to increase. We are already seeing that increase and should continue to see increases over the next few months or years. We are trying to assess the danger that increase could mean in terms of payment defaults.

To your knowledge, what are the statistics on five–year variable rates and on fixed rates for one or two years? How would you characterize the systemic risk in that respect?

Once again, you can answer the question first, Mr. Charles, if that's okay with you.

[Andrew Charles]

Within Canada Guaranty, approximately 80% of our existing risk in force is borrowers who are on a five-year fixed term, and I am going to assume that's equivalent or similar to our competitors

I would say, sir, that the one-year to two-year fixed term is a very modest percentage of the total book, both from a portfolio point of view and from the point of view of new flow coming in.

What we have witnessed over the past year is a fairly significant interest rate differential between variable rate mortgages and five-year rate mortgages, where variable rates have become very attractive to borrowers, both in the insurance space and I assume also in the uninsured space. We have seen a significant uptake in the variable rate insurers.

If I could provide some comfort, while there has been a significant uptick—and I believe it's in the 30% to 35% range, though I can confirm that for the committee—the borrower profile of a first-time homebuyer who chooses the variable rate tends to be a little bit more sophisticated and perhaps in a more financially secure situation than the first-time homebuyer who chooses the five-year fixed term.

We've seen a difference in credit scores as well. The variable rate borrower has a higher credit score than the first-time homebuyer who chooses the five-year fixed rate.

We haven't seen any delta or differential in our background in terms of default performance between a variable rate borrower and a fixed term borrower. In fact, our view, based on historical analysis, is that variable rate mortgages perform very well.

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

Thank you.

I see that my time is nearly up.

Mr. Levings, do you want to add anything to Mr. Charles' very good answer?

[Stuart Levings]

I would add just one point. In our portfolio we've done some analysis showing that about 95% of the borrowers who are coming up to renewing their mortgage over the next three years are actually going to be renewing at rates equal to or lower than their current rate, and that's because so many have taken these five-year fixed term mortgages. It actually does alleviate some of the pressure on our portfolio and borrowers through the rising rate environment.

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

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Ste-Marie.

We will now move to the NDP.

MP Blaikie, you have six minutes, please.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much, Mr. Chair.

With the indulgence of our witnesses I'm just going to take a quick moment for some committee business and give notice of the following motion:

That the committee undertake a study pursuant to Standing Order 108(2) of the current state of fiscal federalism in Canada, including but not limited to fiscal equalization payments, the Canada health transfer, the Canada social transfer and the possibility of a new federal transfer to equalize the disproportionate costs of climate mitigation and adaptation across Canada's provinces and territories; that the committee endeavour to hear from the government of each province and territory as a part of its study; that the committee hold at least two meetings for this study prior to Friday, June 17, 2022; and that the committee table a report to the House on this matter no later than February 3, 2023.

That's just the notice of motion, Mr. Chair. I am not moving it.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP blaikie.

I just have a quick question. Have you provided that to the clerk, and has it been distributed?

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

I have, indeed.

It hasn't been distributed yet—

[The Chair, Liberal, Peter Fonseca]

No, it hasn't.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

—but I expect it will be translated and then distributed in relatively short order. I just want to offer that up for the committee sooner rather than later.

To our witnesses, maybe I'll just start by saying that I think I'm like a lot of Canadians in that I don't have an intimate knowledge of the mortgage insurance industry.

I heard a couple of comments earlier that I just want to ensure I understood properly. I thought I heard you say that your companies don't insure first-time homebuyers. I'm not sure if I heard that properly or not, so I would welcome your feedback on that.

The second thing I heard was in respect to investment properties, that you don't insure in the investment space.

Before proceeding with any further questions, I just want to make sure that I didn't misunderstand either of those two comments and that we're on the same page.

[Andrew Charles]

To answer your first point, our business and that of a mortgage default insurer is primarily focused on the first-time homebuyer. Seventy-five percent of our business is that first-time homebuyer, so that's absolutely our focus.

To your second question, I referenced in my opening comments that the Department of Finance has a sandbox where they determine, along with OSFI, what products can be insurable. Investor properties are not eligible from a mortgage default insurance perspective, so they remain at a conventional....

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

How is investor property defined then? Is that anything beyond the first property that you own?

I know there are different investment categories. There are large institutional investors, but then there are also Canadians who own their first home and decide they're going to buy a second one and rent it out. Some folks have got to the point where they own 10 or 15 or more houses along those lines. As they acquire additional single family homes, are those considered investment purchases or are those insurable, either under your business or under CMHC?