Evan

CMHC boss Evan Siddall has defended efforts to tame real estate prices and debt

With regulators sticking to their guns on mortgage stress tests, the potential is there for other parties to get involved

Following a barrage of criticism and growing angst within the real estate industry, Office of the Superintendent of Financial Institutions (OSFI) assistant superintendent Carolyn Rogers faced the noise in a recent speech to the Economic Club of Canada.

Rogers reminded the Toronto crowd of the rationale behind her federal agency’s B-20 mortgage stress test, summarizing its mindset during the now-distant Canadian housing boom. “The prevailing sentiment that house prices would only go up and interest rates would only go down was, in our view, contributing to an overreliance on collateral value and not enough scrutiny of a borrower’s ability to repay a loan, particularly if conditions were to change,” she said. “Against a backdrop of record levels of consumer debt, this was a level of risk-taking that OSFI decided needed to be reined in.”

As it turns out, interest rates could go up—and though they’ve stabilized, mortgage rates have climbed more than 100 basis points since bottoming out in early 2016. This led to the discovery that Canadian home prices could succumb to the laws of gravity, with last year’s 4-percent average decrease marking the first annual drop since 2008. Declines have been magnified in the resilient city of Vancouver, where prices keep sliding monthly, a trend once considered unimaginable.

Rogers added that her concerns reach beyond the West Coast. “The most common criticism is that we implemented a national policy to deal with a localized problem—that of extreme price escalation in the residential property market that only exists in Toronto and Vancouver,” she said. As Rogers pointed out, such critiques often come with the suggestion that borrowers in other cities that haven’t seen such price increases shouldn’t have to take the stress test.

“This criticism assumes that B-20 was designed to target escalating home prices, which it was not,” Rogers explained. “B-20 was designed to target mortgage underwriting standards. And sound underwritings look the same, no matter what city or province you live in.”

Market pressures could force OSFI to crack, she admitted: “Should that margin of safety be monitored, and should changes be considered if conditions in the environment change? Of course they should.”

Just what is considered an environment change? In 2018, national home sales volume tumbled to a six-year low, according to the Canadian Real Estate Association; B.C. sales plunged 24.5 percent, dipping below the 10-year average. OSFI’s calls for prudent underwriting standards and less debt could soon be cut short, especially with a federal election looming. To appease voters, there’s a strong chance that Finance Minister Bill Morneau will stretch mortgage amortizations to 30 years for first-time buyers. The industry would welcome such a move— especially home builders in Toronto, which suffered an 18-year low in new-property sales in 2018.

The political tug of war is far from over, though. “The stress test was extended to 5-yr mortgages in 2016 to protect future economic growth,” Evan Siddall, Canada Mortgage and Housing Corp.’s outspoken CEO, tweeted in February. OSFI added the B-20 test as an underwriting safety buffer, Siddall noted. “Since neither decision was founded on low rates, I wouldn’t foresee a rate-driven readjustment,” he argued.

Siddall also said that stress tests have reduced the average equilibrium national house price by 3.4 percent—7.9 percent and 5.3 percent in Vancouver and Toronto, respectively—CMHC research shows. “Lower prices and less debt helps [first-time homebuyers].”

With no clear winner in sight, it looks like the battle has just begun.