Mortgage carrying costs are rising as interest rates and debt servicing costs climb. The mortgage qualifying threshold is receding rapidly for many.
Interest rates on five-year fixed mortgages have already doubled, climbing to over five per cent. Already, a rising number of people can’t qualify for a bank mortgage. Rising interest rates hamper house-buying applicants, particularly those with erratic or short employment history or who have too little for a down payment. More house buyers will have to rely on mortgage insurance or assistance underwritten by Canada Mortgage and Housing Corp. (CMHC, a Crown corporation) to get their loans from a bank or credit union.
While CMHC’s mandate is to help potential buyers achieve their home ownership dream, it backs some of the riskiest and most marginal buyers. CMHC forecasts that any substantial increase in Canada’s unemployment rate would affect housing prices and mortgage loan delinquencies
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Canada’s economy may already be sliding into recession, risking increased unemployment and falling home prices. CMHC’s now-healthy financial situation could be wiped out entirely by just a three per cent rise in unemployment to 8.1 per cent, bringing a 20 per cent decline in average home prices.
Canada’s price housing index has jumped 50 per cent in the past two years, so a retreat of just over half of that isn’t overly pessimistic. Such a relatively mild recession, CMHC suggests, could wipe out 75 per cent of the federal government’s equity in CMHC. Since interest rates are likely to rise significantly before subsiding, the impact on CMHC’s finances could be even worse than current sensitivity analysis indicates. That is, if the effects are worse than expected and unemployment soars (as it did in 1981 and 1982).
It’s unclear if the federal government and, by extension, taxpayers are doing higher-risk, lower-income mortgage debtors any favours by helping them buy barely affordable homes. Crucially, if they’re lower-paid, first-to-be-fired employees working in economically sensitive industries, vulnerable to layoffs, their inability to make mortgage payments could skyrocket.
A 2017 study by the Frontier Centre estimated that CMHC’s potential divested value could be in the range of $12 billion to $27 billion. The estimates used by Frontier were market value comparisons (price/earnings; price/book; and similar metrics) and an intrinsic (discounted cash flow) method.
However, these valuations of CMCH wouldn’t hold in the case of a major recession with job losses and crashes in the greater Toronto and Vancouver housing markets, making CMHC’s value plummet.
While there’s surely a place for higher-risk mortgage lending or mortgage guarantees, private firms, with a keener interest in survival without bailouts and no public interest role foisted on them, can fill the role. Such companies exist.
The next housing slump might be fatal for CMCH. The Crown corporation should be sold, and the sooner the better.
Ian Madsen is the senior policy analyst at the Frontier Centre for Public Policy.
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