Finance Committee on April 4th, 2022

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

One of the recommendations you're both making is that we should allow mortgages to be amortized over 30 years. I want to hear whether you're talking about first-time buyers who should be able to amortize their mortgages over 30 years, or do you mean anyone? That's my first question.

I think that we put in a series of measures a few years ago to try not only to stabilize the marketplace, but, I think, also to protect it from defaults if interest rates went too high. That's when we actually reduced it from 30 years down to 25, if I recall correctly.

I want to hear a little bit more about your 30-year recommendation and whether it's just for first-time homebuyers or for all, and why you think that would be a prudent measure at this point.

[Stuart Levings]

The 30-year amortization is currently available to any buyer who is not insured. Whether you're a first-time buyer or not, if you're insured, the current rules dictate that the maximum amortization is 25 years.

What we're advocating for is that the insured buyer also be allowed access to the 30-year, recognizing that it is a slight stimulant on the demand side, but in our view, it is simply long overdue that this final levelling of the playing field should occur. They are already, in every other aspect, on a level playing field as far as the mortgage rate stress test, the underwriting criteria, etc., are concerned, and I think this would be a final step to at least give those first-time homebuyers the same opportunity that uninsured buyers are currently able to access.

[The Chair, Liberal, Peter Fonseca]

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

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

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

Thank you, Mr. Chair.

Once again, my question is for Mr. Charles and Mr. Levings. However, as I have only two and a half minutes this time, it will be more difficult to get an answer from both.

In the current situation, most households will expose themselves to more risk to purchase a home. As the prices are very high, they will purchase a home at a price that is higher than what would be desirable for maintaining a comfortable level of risk. So there is greater risk exposure, in my opinion.

At the same time, as the real estate market is bullish—in other words, the prices seem to be increasing steadily—banks and financial institutions may have an interest in taking more risks. They may be willing to provide a loan to a household even if the risk of payment defaults is higher, as they will be able to resell the residential property at a higher price and thereby recover the costs anyway. So we would return to a scenario akin to the one that led to the crisis of 2007, 2008 and 2009, especially in the United States.

I don't mean to refer to your specific field of activity, but, given your knowledge of the entire mortgage market, do you think the mortgage market is currently facing more risks? Is that a concern for you?

[Andrew Charles]

I think whenever you see an elevated price appreciation like we've seen in the Canadian market, all our risk sensitivities are naturally increased.

I'd say two things about this. One, please keep in mind that to pass the stress test, a borrower today is essentially required to qualify at a rate very close to six per cent, which in itself contains some buffer, so I would take some degree of comfort from that.

In my experience, and in my assessment of Canada's lending institutions—the majority of whom are also OSFI-regulated, much like the three mortgage default insurers—they seldom would look at someone looking to flip. I think the primary motivation of banks, lending institutions and insurers is to look at the housing market as for shelter.

That's not always the case, but it's primarily for shelter, and I think they take a very responsible credit-adjudication process.

[Stuart Levings]

I would just add that in our regular discussions with lenders, the dialogue often centres around what other precautions we are taking in our business, given that we do take the low-down-payment mortgages, and what measures we are taking on how we value properties.

There is a lot of back and forth, and I would argue that lenders are thoughtful about the environment and how best to mitigate that risk.

[The Chair, Liberal, Peter Fonseca]

Thank you, and thank you, MP Ste-Marie.

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

Thank you.

[The Chair, Liberal, Peter Fonseca]

We're moving to MP Blaikie for two and a half minutes.

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

Thank you very much.

Understanding that investors don't have insured mortgages, I am nevertheless curious about the following. We've heard around this table of investors maybe buying an initial property and then using the rapid increase in the value of their assets to leverage another purchase and so on, and given the stark rises in asset value year over year for the last number of years, that has allowed people to acquire a number of properties if they're in the business of doing that.

I'm just wondering if you have any comments or have done any thinking about what risk their exposure presents to the market in a context of rising interest rates, and particularly not being insured, either to your business specifically or.... Do you have any thoughts on what, from a public interest point of view, we ought to be concerned about in the nature of that activity and the lack of insured mortgages in that space?

[Stuart Levings]

Maybe I'll start with that one. The way we think about it is that a lot of investor activity tends to focus on condominiums and, as a result, we, and I would argue our lenders, think about the condominium type of property as a very different animal. When you have situations like that, where a particular investor owns a number of units and something goes wrong—either rates are rising and they can't service the debt anymore or there's an exodus of renters and there are vacancies—we tend to see more of a bulk selling, which does put downward pressure on prices.

As a result, when we think about a condominium, we do look at the investor content within a building and what level of risk that represents, recognizing that, unlike single detached-type properties, you might have more of a group or bulk selling exercise that occurs at one point, driven by investors. To our mind, it's a different type of underwrite, and I think our lenders look at it the same way to try and mitigate some of that risk.

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

Would it be fair to say, for your typical Canadian listening in who is wondering what all of this means for them, that if rising interest rates lead to serious distress for investors who are overexposed, the biggest risk for Canadians who own their own family dwelling would be maybe not being able to move? If they have a really big mortgage and the value of their home ends up being less than their mortgage, the biggest risk for them is that they would have less mobility, but it's not necessarily a financial crisis for their individual household.

Does that ring true? What do you think are some of the other takeaways that a member of the Canadian public who is listening today should take from this?

[Andrew Charles]

The point that you're referencing, sir, relates to negative equity, where there's a Canadian in their home and their mortgage exceeds the market value. Today I would say that there is very little negative equity, if any, in the Canadian marketplace, just by virtue of where prices have gone over the past two years.

If I could go back to your comment on investors, to perhaps take a more nuanced view, I don't think investors who are flipping houses within 12 months are necessarily positive for the Canadian mortgage and housing finance framework. We would take the view that if the investors were to be curtailed due to high interest rates or other mitigating factors, you'd see a much stronger inventory come on to the marketplace, and that would largely be in downtown urban cores. You'd probably see a more nuanced, segmented approach, where condos may suffer some price devaluation, depending on how many investors would exit. I would say that would hit that particular market segment much more than the single family, owner-occupied person who is in it for shelter.

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

Thank you very much for that.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

We will now move to MP Fast, for the Conservatives, for five minutes.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you to our two witnesses. Your testimony has been very helpful as we study inflation in Canada.

I would like to go back to Mr. Charles—and Mr. Levings, feel free to jump in as well—to your comment about interest rates.

You mentioned that the number one factor you take into account as you assess credit worthiness and other risk factors is employment status. Did I hear you correctly?

[Andrew Charles]

What I would say, sir, is that elevated unemployment rates drive mortgage defaults more than anything else.

[Ed Fast, Conservative, Abbotsford, BC]

Okay. I'd really like to go back to interest rates. Surely, rising interest rates would concern you.

You said that there was a significant uptick in variable rate mortgages. To be clear, you do insure variable rate mortgages. Is that correct?

[Andrew Charles]

Correct.

[Ed Fast, Conservative, Abbotsford, BC]

You're both in the business of assessing and managing risk, so you've obviously done some analysis on the impact that rising interest rates would have on the portfolio of mortgages that each of your companies carries.

Could you comment on what that analysis might have shown and what rates of interest would start to create problems for the folks you insure?

[Andrew Charles]

What I would say, sir, just as a feature of the variable rate mortgages—and then we can come back to any analytical work—is that if you are a variable-rate borrower, whom we do insure, you have that ability to convert to a fixed-term product at any time in your tenure as a variable-rate borrower. If you're a borrower who is in a variable rate mortgage and you see a rising interest rate environment, we'll see a lot of conversions, and lenders will see a lot of conversations, from variable rate to fixed term. I believe that is a free option that exists for borrowers.

[Ed Fast, Conservative, Abbotsford, BC]

To my exact question, at what point in time do rising interest rates start to represent a very significant risk to your portfolio of mortgages?

[Andrew Charles]

I will pass that off to my chief risk officer, who may have more precise analytical support for that.

[Curtis Gergley, Chief Risk Officer, Canada Guaranty Mortgage Insurance Company]

Thanks, Andy.

To Andy's point, I would say that everyone does qualify at the qualifying rate, which is 5.25%. Even people in variable rates today, in which you can get a 1.5% variable rate, are actually qualifying at a 5.25% rate.

I would think we wouldn't start to have any difficulties until you get into maybe a 4% or 5% increase in interest rates, and when you look at forecasts, no one is forecasting at the moment that much of an increase. If it goes up 2%, I don't think we'll see a big default problem.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you.

Has either one of you done a comparison between housing affordability in the United States and in Canada? If so, what are the differences, if any, and what are driving those differences?