Finance Committee on April 4th, 2022

[Stuart Levings]

We certainly do look there from time to time, and it varies, of course, by region.

There's this notion that there's a Canadian housing market when in reality there is no Canadian national housing market. Each region is very unique and specific.

In the major centres, Toronto and Vancouver, they compare very similarly to the major centres in the U.S. for the same reasons. Interest rates are where they are, but house prices are very high in all of these major cities, whether New York, San Francisco or otherwise. Once you get outside of those, I think there is definitely a general acceptance that affordability is still a little bit better in the U.S. given that they have a lot more supply. They have a lot more availability of housing stock, whereas with Canadians we tend to be more concentrated around the major centres and therefore we do suffer from this systemic undersupply issue.

[Ed Fast, Conservative, Abbotsford, BC]

Is either one of you familiar with the shared equity program the government announced three years ago?

[Stuart Levings]

Yes.

[Ed Fast, Conservative, Abbotsford, BC]

The take-up has been underwhelming.

I'd like to know whether there's a greater role the private sector could play in delivering this program more effectively and perhaps in a more timely manner.

[Andrew Charles]

As it relates to shared equity, there has been very modest uptake on a flow basis that represents 2%, 3% or maybe 4% of our total flow, something in the low single digits.

I believe Canadians have a general reluctance to share any upside in their homes with the government. A variety of private shared equity programs have emerged on the marketplace. I believe the underlying premise that Canadians want to share in any upside is unproven at this point.

[The Chair, Liberal, Peter Fonseca]

Thank you.

That's your time.

Thank you, MP Fast.

We're moving to the Liberals with MP Chatel for five minutes.

Go ahead, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

Before I start putting my questions to the excellent witnesses we are hearing from today, since financial markets and the financial sector will play an extremely important role in the transition to a green economy, I would like to move the following motion:

That the committee undertake a study on the current state of play on (a) “green finance”, (b) “green investment”, (c) “transition finance”; and (d) transparency, standards and taxonomy. That this study consist of: (a) At least 5 meetings, with each meeting lasting no less than 2 hours (b) Witnesses, including: Representatives from the OECD Centre on Green Finance and Investment, the United Nations Environment Programme (UNEP), and other key relevant federal, provincial and territorial, international leaders be invited to give testimony; Peter Routledge, Superintendent, Office of the Superintendent of Financial Institutions; Kathy Bardswick, Sustainable Finance Action Council; Ms. Barbara Zann, Mr. Mark Carney and Mr. Dan Breznitz as individuals; International Sustainability Standards Board. That the committee present the report on this study with its recommendations to the House on June 17, 2022. That the Chair be empowered to set timelines for witness recommendations from committee members, and to schedule witness appearances.

I don't want the committee to debate this now. The debate could be held at a later date, as decided by the committee.

I will now put my questions to the witnesses.

I'll switch to English.

There were rising issues with home affordability in major cities before the COVID pandemic, but something that we saw during the pandemic was the overheating of secondary markets in smaller communities.

Starting with Mr. Charles, can you speak about what the impact of this has been on your clients and any other trend that you have noticed over the course of COVID?

[Andrew Charles]

We certainly saw, in the early days and throughout the pandemic, a significant amount of first-time homebuyers purchase property outside the downtown cores or outside the urban centres, right across Canada. To use Toronto as an example, there was a fairly significant movement out to what I'll call “secondary markets”, such as Kingston and Peterborough and that whole range, where people felt far more comfortable. There was an exodus from the city.

As the pandemic has evolved and as Canadians have become more vaccinated and health conscious, we have seen a return, if you will, to the downtown urban cores across the country, due to lifestyle, due to a heightened level of safety as they became vaccinated and due to the overall entertainment and vibrancy component that exists in Canada's urban centres.

In the early days, we saw a significant amount of evolution outside of Toronto, which put a lot of pressure on inventory, because if you have a significant number of purchasers going to a small marketplace, the supply isn't ready to accommodate that, so it resulted in increased prices in some of our secondary markets in Ontario and elsewhere.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you.

Next is Mr. Levings, please.

[Stuart Levings]

Yes, I would concur with those comments.

The slogan we heard a lot of was that people would “drive till they qualify”, and that was really an indication of how, as you get farther and farther out of the major centres, the prices start to come down. Buyers were forced to move out along the major highways to find a community that they could afford to live in.

The work from home and the pandemic environment certainly further enabled that. We think that had a big role to play in the level of exodus, because, to your point, we already had affordability issues before the pandemic, but the whole shift in the work environment during the pandemic exacerbated that situation.

I think we are now seeing more of a return again, particularly back into condos. Whereas they had taken a real hit during the pandemic, people are now looking at them again as a viable form of accommodation, in particular if you are required to go back into the office for some number of days a week. That's important and good, because we want diversification back into the major urban areas. That's again another reason why we are also advocating for a lift in that maximum $1-million dollar cap.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Chatel. That is the time.

Members, we are moving into our final round. Seeing that we do not have enough time to do a full round, I'll allocate the time equally, as I usually do. We'll start with the Conservatives.

I have MP Stewart up for four minutes.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you. Can you hear me?

[The Chair, Liberal, Peter Fonseca]

We can hear you, yes. Please start your video, MP Stewart.

There you go. We want to see you.

That's an excellent background.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

I'm sorry about that.

I'd like to thank our witnesses for taking the time to speak with the committee today. Having the two largest mortgage underwriters in Canada here is very valuable.

Before I ask my questions, I'd like to point out that both of our witnesses passed CMHC last year in market share for underwriting of mortgages, in part due to CMHC's mismanagement in making their rules even tougher for first-time homebuyers, a rule that CMHC later came to regret, as is easily proven by the fact that they reversed their decision.

My first question is for Mr. Levings.

How did you overtake CMHC as Canada's number one lender for mortgage insurance?

[Stuart Levings]

Thank you for the question.

I would say this. The obvious first catalyst was the point you made around the sudden pullback in what was available from CMHC.

We have had a very long run in the industry in Canada. We've been around for more than 25 years and have very strong relationships with all our lenders and have always aspired to provide excellent customer service.

Once the major player at the time had withdrawn a significant portion of the mortgage insurance available to their borrowers, lenders naturally turned to the private sector to ask if we were going to follow suit or if we would continue to support the industry and borrowers. We naturally assumed that lenders needed the support and that consumers needed the support to have ongoing access to mortgages during the pandemic, and we chose to stay the course. As a result of that and our underlying strong service, it was a fairly quick market share accretion that followed and that took us up to be the number one mortgage insurer in Canada.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you for that. I appreciate the answer.

Do you feel, Mr. Levings, that Canadians trust you more than CMHC?

[Stuart Levings]

That's a very difficult question to answer.

I would say that we do believe that our customers have tremendous faith in us as a counterparty, given the level of capital we hold and the rigour and discipline with which we originate mortgages.

I would say that Canadians, in general, have come to understand a lot more about the mortgage finance market and the players therein just because of the absolute amount of focus that's been put on this industry over the last many years. As a result they understand and know the role that we, as mortgage insurers, play, and I think they do have faith in the private sector at this time.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you for that.

Mr. Levings, I have a couple of questions here and I'll ask them both.

What role do you see CMHC playing in the future? Also, do you feel there is a need for them in the mortgage insurance space anymore? I'm just curious to hear your thoughts are on that.

[Stuart Levings]

Competition is important, and we value competition. We think it's good for consumers. It helps to keep us all on our toes. I would argue that we're all—at least the track record would suggest—responsible competitors, and I would suggest that there is a role for CMHC to play as one of those competitors.

I think the days of their being a significantly dominant player with a 50%-plus market share are likely over. I think the role they play today at the 30% to 35% market share level is good for our industry and, more importantly, good for the consumers who at the end of the day are the ones who are getting the homes.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you, Mr. Levings. I appreciate your responses.

I'd like to extend the same question to Mr. Charles. What role do you see CMHC playing in the future, and do you feel there is a need for them in the mortgage insurance space anymore?

[Andrew Charles]

CMHC has played a very strong stabilizing role in Canada since the end of the Second World War. I would say that there is no need or requirement for CMHC to take on a predominant market share.

One of the interesting aspects of the pandemic is that Canada's housing finance system worked very well with the two private companies representing more than 70% of the mortgage insurance flow in Canada. I think to some extent that was a bit of an acid test, if you will, during the early days of the pandemic when economic uncertainty was a really key consideration.

As it relates to mortgage default insurance, CMHC, in our view, isn't required to play a much more significant role.

It's hard fought. Market share matters. I would say that risk management matters just as much as market share, if not more, and we always want to be very thoughtful about the risk we're taking on.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Charles.

Thank you, MP Stewart.

We're moving to the Liberals with MP Baker, for four minutes.

Go ahead, please.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Thanks to all of our witnesses today. I found your testimony very insightful and I have learned a lot. Thank you.

First of all, I just want to circle back to you, Mr. Levings. I'll start with you as I believe it was you who was speaking about this earlier.

What I've heard from the two of you today is that the primary risk for defaults is driven by the unemployment rate. Is that correct?

[Stuart Levings]

That is correct, yes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.

I know that Mr. Gergley was helping to respond to this question, and I just want to make sure I understand this part as well. I heard that the way mortgage loans are offered or “originated”, which I believe is the terminology, is such that when lenders make the loan or originate the loan, they price in a little bit of flexibility to ensure that there is tolerance, if you will, for interest rate scenarios that might change. In other words, they take into account the fact that interest rates may rise and what the impact of that would be on the payment that the mortgage holder has to pay. They price in a little bit of flexibility so that if interest rates go up, the borrower can afford to pay the mortgage.

Is that correct?