5% Down Payments at Risk? Canada’s housing agency says it must “avoid exposing young people” and “taxpayers” to “amplified losses that result from falling house prices.” CMHC CEO Evan Siddall said today, “Unless we act, a first-time homebuyer purchasing a $300,000 home with a 5% down payment stands to lose over $45,000 on their $15,000 investment if prices fall just 10%, which we are forecasting.” CMHC says its calculations include the mortgage insurance premium and the costs of selling the home if forced to do so because of unemployment or any other reason. “In comparison, a 10% down payment offers more of a cushion against possible losses…We are therefore evaluating whether we should change our underwriting policies in light of developing market conditions.”
What it Could Mean: Some will take Siddall’s comments to mean the days of 5% down payments are numbered. Siddall told Parliament’s Standing Committee on Finance that, “We’re talking to our board of directors this week…we may restrict the business we do in the short run.” But Siddall tells us that “We have made no decisions” with respect to down payments, and reminds us that down payment increases on insured mortgages would be the Minister of Finance’s purview, not CMHC’s. And “there’s no talk of that [e.g., 10% minimum down payments across the board] right now.” Indeed, a 10% minimum down payment would protect borrowers, but it would also be pro-cyclical, meaning it could remove demand from a weak market and accelerate price declines. That’s why Siddall adds, “We need to be careful not to act precipitously” and he stresses that “We expect any economic slowdown to be temporary.” CMHC is projecting a rebound in housing to pre-COVID levels by sometime in 2022.
There are Still Two Other Insurers: It’s possible that one or both of CMHC’s two private competitors could continue insuring mortgages in market segments that CMHC pulls back on.
Evan Siddall, CMHC CEO, Testifying Remotely – May 19, 2020
But Wait There’s More: Here’s what else Siddall said that will raise concern:
“CMHC is now forecasting a decline in average house prices of 9 to 18% (peak to trough) in the coming 12 months…There will be greater declines in oil-producing regions (Alberta, Saskatchewan and Newfoundland) and in places where house prices got ahead of themselves (Toronto and Vancouver).”
“Something like 2% of insured mortgages could experience losses,” he says, stressing that forecasting with accuracy is almost impossible given so many unknowns.
“Trees don’t grow to the sky…The musical chairs game [with housing] is going to come to an end…and young people, who are very highly leveraged [could suffer].”
CMHC says almost 20% of mortgagors will have requested mortgage payment deferrals by September.
The housing agency is planning for a “growing debt ‘deferral cliff’ in the fall,” Siddall says. At that time, deferrals are expected to end and many unemployed Canadians won’t be able to make their mortgage payments.
Ultimately, “As much as one-fifth of all mortgages could be in arrears if our economy has not recovered sufficiently,” he warns.
Debt-to-GDP ratios above 80% tend to intensify “the drag on GDP growth,” he stated, and Canada’s could reach 130% by Q3 before declining somewhat.
The more commonly cited debt-to-disposable income measure will climb from 176% (and we thought that was high) to as much as “230%…through 2021,” depending on how much GDP falls.
“Canadians do a very good job of paying their mortgages even when they’re underwater.”
Economic Perspective: Canada’s economy will plunge 41.3% annualized in the second quarter, according to the average analyst surveyed by Bloomberg. That’s an utterly unfathomable number — one that’s never been equalled in a single quarter. So, given that mass unemployment trumps tight supply, low interest rates and other bullish housing factors, CMHC has ample reason for concern. It seems highly likely that Canada’s top default insurer will suspend some mortgage programs and/or tighten qualifying rules in the weeks ahead.
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Two thirds of CMHC’s transactional insurance business comes from people putting down 5% to 9.9%. If the Dept of Finance set the minimum down payment at 10% it would crush CMHC’s earnings. Those $2 billion dividends to taxpayers would become a thing of the past.
Our government should have sold off CMHC’s commercial business years ago. It has been killing CMHC with 1,000 policy cuts since 2008. Taxpayers will eventually be left with nothing of monetary value.
They need to raise down payment to minimum 20% as home prices are expected to drop by 20% to 35%. Why put tax payer $$$ at risk when the decline in prices and increased defaults are expected.
I’m sorry, but Siddall is a complete idiot. The scenario is short term, a first time buyer has decades to ride out a period of slightly declining house prices, even for several years as was the case in the early 90’s. The policy prescription would only worsen the situation.
The drop in house prices they are claiming/forecasting must be in the big cities of TO and Vancouver as the Kingston housing market is booming. Houses are being listed one day and sold in a few days in my neighbourhood. Also new construction is not seeing a decline either with upwards of 50-60 new houses/year being built in the west end. Most likely the buyers of some of these homes are TO folk looking to get a cheaper rental place (450-500K in Kingston vs 1M+ in TO). I remember during the financial crisis of 2008 Kingston real estate didn’t drop heavily like the big cities thanks to being insulated with government/universities/hospitals jobs. Will see if this will come to fruition here…
CHMC needs to be brought to heel. Just like Fannie Mae and Freddie Mac in the US, they have contributed to a very dangerous situation driven by politics. History in multiple countries has shown over and over that 20% down payments are one of the 3 Inviolable Natural Laws of prudent mortgage underwriting, the other 2 being borrower credit score above 660 FICO and a reasonable debt service ratio (GDS/TDS). Social goals have to be separate from safe financial practice…or the very people that housing activists want to help the most will be hurt the worst when things inevitably implode…just like in US 2008 disaster. “It couldn’t happen here” are the last words anybody should be spouting.
I think that is unfair Ron. First time buyers stay in their homes much shorter than “decades.” Most require mobility for work or the ability to upgrade for family reasons. A temporary moratorium on 5% down would impact prices but save a lot of young people some hurt.
Its a self fulfilling prophecy..
Raising the required down payment to 10% will result in decreased demand in the short term and an even steeper fall in house prices. The buyers that are in the 5-10% down payment range will have to wait even longer to purchase their first house.
I just bought my first house and agree that first time home buyers have years/potential a decade+ to ride out this temporary market decrease. All predictions i have seen for the housing market declining are also saying for everything to be back to normal around 2022.
This kinda of policy change could have a huge long lasting negative impact.
@Steve, the problem in the US wasn’t going over 80%LTV. It was going over 95%, and even 100% LTV.
In 2005-2007 it was possible to get >=100% LTV mortgages with cashback deals to cover all closing costs.
What happened to our coveted free market economy. Why does anyone need to rush to save a faulty investment. If saving faulty investments is the right thing to do, why not bail out those who lose on the stock market and people whose businesses fail.
Perhaps it is time that all policy makers retake the Economics 101 class.
What is it that is forcing them to save failing investments in Toronto and Vancouver and not do anything for people in small town Canada.
Just follow all the fundamental rules in the text book.
Don’t buy what you cannot afford – Duh
Don’t make stupid rules that make it easier for stupid people to buy what they cannot afford.
If house prices are falling, let them fall. Why should they not fall.
Anyone who still believes that we live in a free market capitalistic society, needs to wake up from that dream filled sleep.
This whole mess is because of meddling and engineering the markets.
You want to fix it, then let the dice roll and let the market sort itself out.
But then I guess you might think that ot is better to be like those governments that we always criticize as ” always interfering in the markets “
Several posters here are Talking Heads, homeowners who hope that they can keep talking up their house prices, when they crash is clearly coming this time. It is not a different here.
I question even the need for a bureaucratic institution like the CMHC. The banks can access their own mortgage risks without having any oversight. This corporation basically steals a portion of the purchasers down payment which would make a big difference to their payments and outstanding principal amount. The CMHC pays an annual dividend of approximately 250 million and that money goes into general revenue. It is basically another tax. How much are these executives being paid and who knows how many staff it requires to sustain its self.
Time to get rid of it.
0 down would be perfect for us young people to start off with …10 years ago they did it why not now ,problem is paying 1700 in rent with a great credit score and trying to save us getting us no where …just a mother trying to buy a home here and saving is little
Hey alan. you know what would also make a big difference to their payments with just 5% down. the 120bps increase in their contract rate charged by the bank for somebody who isn’t the absolute best prime bower in history. It’s the government guarantee that even makes 95LTV lending feasible at a reasonable rate. You know that 1.99% interest rate being talked about: insured or insurable mortgages only? So no CMHC, no guaranteed insurance, and say bye bye to rock bottom interest rates on very high LTV loans. Pick your poison.
If home prices rise just 2-3% a year, how much are you losing by waiting 5 years to save a down payment? Compare that to a one-time 4% insurance premium. That is just one of home ownership benefits made possible by default insurers.
CMHC doesn’t steal anything. Buyers willingly pay CMHC for the ability to buy sooner than later. Until you convince parliament to overturn the law that requires insurance above 80% loan to value, you’re just spinning your wheels. Insurers aren’t going anywhere.
PS – You’re way low on CMHC’s annual payment to taxpayers. Try $2 billion.
@Andy – Toronto prices are almost 12% lower in one month and no sellers are taking a hit? I don’t think so buddy.
Multiple offers are the exception in more than 95% of markets, not the rule. As for 75% over asking price that is fantasyland except maybe if the property was priced 25-40% under value.
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CMHC made $1.6B last year. Why are they worried now? Time to step up and get us through this pandemic. By the way, who are they protecting? The banks?
Two thirds of CMHC’s transactional insurance business comes from people putting down 5% to 9.9%. If the Dept of Finance set the minimum down payment at 10% it would crush CMHC’s earnings. Those $2 billion dividends to taxpayers would become a thing of the past.
Our government should have sold off CMHC’s commercial business years ago. It has been killing CMHC with 1,000 policy cuts since 2008. Taxpayers will eventually be left with nothing of monetary value.
They need to raise down payment to minimum 20% as home prices are expected to drop by 20% to 35%. Why put tax payer $$$ at risk when the decline in prices and increased defaults are expected.
The only thing this says to me is SELL!!
Sell cheap buy cheap.
I’m sorry, but Siddall is a complete idiot. The scenario is short term, a first time buyer has decades to ride out a period of slightly declining house prices, even for several years as was the case in the early 90’s. The policy prescription would only worsen the situation.
we should make 20% down minimum, otherwise people just cannot afford homes in bad times
The drop in house prices they are claiming/forecasting must be in the big cities of TO and Vancouver as the Kingston housing market is booming. Houses are being listed one day and sold in a few days in my neighbourhood. Also new construction is not seeing a decline either with upwards of 50-60 new houses/year being built in the west end. Most likely the buyers of some of these homes are TO folk looking to get a cheaper rental place (450-500K in Kingston vs 1M+ in TO). I remember during the financial crisis of 2008 Kingston real estate didn’t drop heavily like the big cities thanks to being insulated with government/universities/hospitals jobs. Will see if this will come to fruition here…
CHMC needs to be brought to heel. Just like Fannie Mae and Freddie Mac in the US, they have contributed to a very dangerous situation driven by politics. History in multiple countries has shown over and over that 20% down payments are one of the 3 Inviolable Natural Laws of prudent mortgage underwriting, the other 2 being borrower credit score above 660 FICO and a reasonable debt service ratio (GDS/TDS). Social goals have to be separate from safe financial practice…or the very people that housing activists want to help the most will be hurt the worst when things inevitably implode…just like in US 2008 disaster. “It couldn’t happen here” are the last words anybody should be spouting.
I think that is unfair Ron. First time buyers stay in their homes much shorter than “decades.” Most require mobility for work or the ability to upgrade for family reasons. A temporary moratorium on 5% down would impact prices but save a lot of young people some hurt.
Where is this magical place I can find a “home” for 300k!?
@B
Your choices are endless. Check out Quill Lake, Saskatchewan (wherever that is). They have houses for $19,900.
https://www.hgtv.ca/real-estate/photos/12-incredibly-cheap-houses-for-sale-in-canada-1924455/#currentSlide=15
Its a self fulfilling prophecy..
Raising the required down payment to 10% will result in decreased demand in the short term and an even steeper fall in house prices. The buyers that are in the 5-10% down payment range will have to wait even longer to purchase their first house.
I just bought my first house and agree that first time home buyers have years/potential a decade+ to ride out this temporary market decrease. All predictions i have seen for the housing market declining are also saying for everything to be back to normal around 2022.
This kinda of policy change could have a huge long lasting negative impact.
@Steve, the problem in the US wasn’t going over 80%LTV. It was going over 95%, and even 100% LTV.
In 2005-2007 it was possible to get >=100% LTV mortgages with cashback deals to cover all closing costs.
What happened to our coveted free market economy. Why does anyone need to rush to save a faulty investment. If saving faulty investments is the right thing to do, why not bail out those who lose on the stock market and people whose businesses fail.
Perhaps it is time that all policy makers retake the Economics 101 class.
What is it that is forcing them to save failing investments in Toronto and Vancouver and not do anything for people in small town Canada.
Just follow all the fundamental rules in the text book.
Don’t buy what you cannot afford – Duh
Don’t make stupid rules that make it easier for stupid people to buy what they cannot afford.
If house prices are falling, let them fall. Why should they not fall.
Anyone who still believes that we live in a free market capitalistic society, needs to wake up from that dream filled sleep.
This whole mess is because of meddling and engineering the markets.
You want to fix it, then let the dice roll and let the market sort itself out.
But then I guess you might think that ot is better to be like those governments that we always criticize as ” always interfering in the markets “
Why take your foot off the gas when the clutch is pushed in?
It has never been about the consumer. They are in cahoots with each other.
@Geek
Why would they be in cahoots with each other?
And who is they? CMHC and who else?
Please expound on your conspiracy theory.
Several posters here are Talking Heads, homeowners who hope that they can keep talking up their house prices, when they crash is clearly coming this time. It is not a different here.
If 5% increase in downpayment is the reason you cannot get a house. I don’t think you’re ready for home owner ship and a mortgage.
I question even the need for a bureaucratic institution like the CMHC. The banks can access their own mortgage risks without having any oversight. This corporation basically steals a portion of the purchasers down payment which would make a big difference to their payments and outstanding principal amount. The CMHC pays an annual dividend of approximately 250 million and that money goes into general revenue. It is basically another tax. How much are these executives being paid and who knows how many staff it requires to sustain its self.
Time to get rid of it.
0 down would be perfect for us young people to start off with …10 years ago they did it why not now ,problem is paying 1700 in rent with a great credit score and trying to save us getting us no where …just a mother trying to buy a home here and saving is little
Hey alan. you know what would also make a big difference to their payments with just 5% down. the 120bps increase in their contract rate charged by the bank for somebody who isn’t the absolute best prime bower in history. It’s the government guarantee that even makes 95LTV lending feasible at a reasonable rate. You know that 1.99% interest rate being talked about: insured or insurable mortgages only? So no CMHC, no guaranteed insurance, and say bye bye to rock bottom interest rates on very high LTV loans. Pick your poison.
Well put David.
Alan:
You’re very confused.
If home prices rise just 2-3% a year, how much are you losing by waiting 5 years to save a down payment? Compare that to a one-time 4% insurance premium. That is just one of home ownership benefits made possible by default insurers.
CMHC doesn’t steal anything. Buyers willingly pay CMHC for the ability to buy sooner than later. Until you convince parliament to overturn the law that requires insurance above 80% loan to value, you’re just spinning your wheels. Insurers aren’t going anywhere.
PS – You’re way low on CMHC’s annual payment to taxpayers. Try $2 billion.
I read all comments and would like to say that as of
Now, there are no sellers taking hit on listed price.
I’m in market for buying and every listing agent is
Happy as property getting multiple offers and
Some lucky (75%) over listing price. It baffles me.
One day some news says property picking up
Next hour news says economy in shambles. What
To believe and who, is very difficult.
Can anyone guide…
@Andy – Toronto prices are almost 12% lower in one month and no sellers are taking a hit? I don’t think so buddy.
Multiple offers are the exception in more than 95% of markets, not the rule. As for 75% over asking price that is fantasyland except maybe if the property was priced 25-40% under value.