Finance Committee on April 4th, 2022

[Andrew Charles]

They would not be deemed to be insurable, sir.

We look at the Bank of Canada's report on the percentage of the marketplace that's occupied by investors, and I don't have the Bank of Canada's precise definition in front of me, sir, but I would think that if I own one house, buy another house and rent out that secondary house, I would be deemed to be an investor.

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

Okay. Thank you very much for that.

As I say, it's not a space I know very well. I think I'm not alone in that, for folks listening across the country. I just wanted to make sure that I had understood your comments properly.

I think Mr. Levings was just speaking a little bit about five-year terms and the effect of people who locked-in five years ago now looking at renewing around rates that are, for the moment, comparable. I am curious to know if you can speak a little bit to the effect of rising interest rates. At what point do you think a higher interest rate would begin to show serious effects, either within your own business or more generally within the Canadian economy, for folks struggling to be able to make their payments and maintain their mortgage?

[Stuart Levings]

Yes, let me address that.

Rising rates have never traditionally been very highly correlated with defaults or delinquencies, simply because generally in a rising rate environment the economy is doing quite well.

Second, there are a lot of options that borrowers have when they renew. Therefore, even if they were in a five-year term and they're now renewing and the new five-year rate is too much and they think they would be under pressure, sometimes lenders can offer a three-year or even a shorter term, which temporarily gives borrowers some reprieve. It's a lower rate generally, and perhaps they're just going through some disruption in their employment, and that gets them through.

In addition to that, as mortgage default insurers, we do offer and have a lot of what we call “loss mitigation programs”, which allow us to intervene in a situation where a borrower is impacted perhaps by a higher rate that would otherwise cause them to go delinquent. We're able to buy them some time or look at measures to adjust their loan, together with the lender, to allow them to continue on.

Those measures can sometimes be renewing an extension on their amortization, which essentially brings down the interest rate, perhaps even allowing them to capitalize on any arrears that they are in to allow them to continue on.

In a nutshell, there are tools available that really do mitigate the impact of a higher rate on a renewal. We see it as basically unnecessary to cause a default just become someone's interest rate is going to be a little higher.

The impact on our businesses is relatively muted. The impact, more broadly speaking of course is going to be seen more at the origination side, people who are looking to buy a home who now have reduced buying power in an environment where what's available to them is just so limited because they can't reach the new required price level to get into the housing market. They're looking at a very limited stock of perhaps condos, semi-detacheds or townhouses, and that's the current situation. Most of the first time buyers we see, if they're looking to buy anything under $700,000, the supply, particularly in the greater Toronto area, greater Vancouver area, is extremely limited of what you can get for that kind of money.

[The Chair, Liberal, Peter Fonseca]

Thank you, and thank you, MP Blaikie. That's the time.

Members, we're moving to our second round of questions, starting off with MP Chambers from the Conservatives for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair, and thank you to our witnesses for coming today.

My NDP colleague, Mr. Blaikie, actually asked what were a number of my questions, so we'll have some additional ones here that I hope we can benefit from.

I have a question about how the mortgage market operates. When CMHC changes a premium rate, are you obligated through regulation or otherwise to also change your premium rate, or do market forces require you to change your rates in the same fashion?

[Andrew Charles]

We're not required by regulatory driver to match either up or down. That said, CMHC has historically been the price leader or price maker in a relatively modest-sized oligopoly. The majority of our lenders operate on a system-driven toggle, where they send x number of deals to CMHC and allocate x number of deals to Canada Guaranty and Sagen. If there were a pricing differential—let's say CMHC were to reduce premiums—you would see a fairly significant flow volume being diverted from the private sector and going to CMHC. The change in the market would be would be relatively instantaneous.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

Thanks for the clarification on the investor class. Are non-resident foreign purchasers insurable through mortgage insurance as well, or is it the same as investors?

[Stuart Levings]

We are able to insure foreign buyers, not if they're buying as an investment. If, however, they're here and new to Canada and are buying to occupy, we are able to insure them.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

Have you been asked by StatsCan or the Department of Finance to provide information on foreign purchasers? We've spent the last number of years having a really difficult time determining what kind of activity that makes up in the market.

[Stuart Levings]

We do provide a fair bit of data to both the Department of Finance and OSFI, including the level of what we would call ”new to Canada purchasers”. I would indicate that it's an incredibly low number of those who are coming in as buyers in the insured space, given that these are people who, generally speaking, if they're foreign buyers for investment purposes, we can't service. We see single-digit levels of those new to Canada in our portfolios.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you. That's very helpful. It's just a smaller portion of non-resident purchasers, so it wouldn't capture all of it.

[Andrew Charles]

As an additional point of clarification on that, we also see slow single digit...but the majority of new people coming to Canada first get permanent residence, and then enter the housing market—not that many of them actually come into the housing market on day one, once they've immigrated to Canada.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

We had CMHC testify at this committee, and it was suggested that CMHC is trying to grow its market share from somewhere in the 30th percentile to somewhere between 40% and 50%.

I look for a comment from both witnesses on this. Is there part of the market that CMHC serves that you don't serve and that makes sense? How does it work competing against a government-funded agency that all of a sudden has decided to change its strategy yet again and grow its market share when it was actually trying to reduce its size over time?

[Stuart Levings]

We compete with CMHC, as we would with any other competitor. There is really no area of the country or product type that they offer that we don't as the private sector offer too.

Our view is that the nature of the industry is such that we think that probably around a third of the market would be an appropriate level for them. Currently they are coming back from an extremely low level, having pulled out of a segment of the market during the pandemic, whereas we, and our other private sector competitor here, Canada Guaranty, continue to support the market.

In all truth, we compete as if they were another private sector player. There really are no other differences, other than the level of service we provide to our customers.

[Adam Chambers, Conservative, Simcoe North, ON]

I'll ask perhaps just one quick yes-or-no question to the both of you.

Do you think that in this current market environment, now is the time for additional demand-side proposals from the government to give first-time buyers additional money or to make it easier to bid on houses? Is now the time for that?

[Andrew Charles]

It's a very difficult question because I'm very sensitive to piling on stimulus in a marketplace that is particularly heated. However, I would say that in that first-time homebuyer segment, sir, which represents less than 20% of the market, I believe there is room, particularly to adjust the 2012 insured purchase price maximum.

[Stuart Levings]

I would agree, and I would add the 30-year amortization as perhaps the one other measure I would consider appropriate, but nothing beyond that.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, and thank you, MP Chambers.

Moving to the Liberals, we have MP Dzerowicz for five minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Mr. Chair.

I'm actually going to move a motion. I move:

That, given the increasingly unpredictable global economic outlook, exacerbated by the current geopolitical crisis in Europe and the resulting instability, it is vitally important the committee undertake a study focused on strengthening our internal economy by harmonizing regulations among the provinces and territories and eliminating barriers to the free movement of people, goods, and services and that: a. The study consists of at least five meetings, with each meeting lasting no less than two hours; b. Witnesses, including Stephen Poloz, Special Advisor at Osler, Hoskin & Harcourt LLP, Goldy Hyder, Chief Executive Officer of the Business Council of Canada, Professor Trevor Tombe, Statistics Canada, and other key relevant federal, provincial, and territorial leaders be invited to give testimony; c. The Chair be empowered to set timelines for witness recommendations from committee members; and to schedule witness appearances. d. The committee present a report on this study with its recommendations to the House as soon as possible.

After that, Mr. Chair, I'm going to adjourn the debate. I don't expect us to have a big discussion on that today because we have some outstanding witnesses today whom I'd like to pose some questions to.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

First, I want to say a huge thanks to both of our witnesses for their excellent testimony.

I think that both of you have talked about how there is a great need to boost the supply of housing that is affordable, not just “affordable housing”.

We've been told that all three levels of government have a role in ensuring this. Would you have a specific recommendation about what areas all governments could collaborate on to address the housing affordability issue?

Mr. Charles, maybe I'll start with you.

[Andrew Charles]

I think that increasing the housing supply was mentioned as our number one requirement here in Canada. It will require, in our view, all three levels of support.

I have maybe two quick observations. Whenever perhaps the federal government or the provincial government is launching new mass transit or supporting new mass transit initiatives, there could be an assigned density requirement along any new mass transit route to increase the density around those infrastructure spends, perhaps tying the capital to that.

Second—and I think this is a tougher hill to climb—there is a degree of Nimbyism in Canada. I should use a far more elegant word than that, but that is the word I would use. I say so because it can be tough at the municipal level. We would support all three levels of government working their way through this exercise.

[Julie Dzerowicz, Liberal, Davenport, ON]

Do you have anything to add, Mr. Levings?

[Stuart Levings]

I would add that the heart of the matter here in our view is the type of supply that is being focused on. I think the density issue is clearly a good solution to that, meaning that we need more dense-type housing in urban areas, that is, more townhouses and semi-detacheds that can be built in existing areas that are closer to the major urban areas. The sprawl we've seen over the last number of years has reached the point, notwithstanding people working more work from home, of becoming uncommutable for people who work in a city but would have to live so far away.