Worry about Canadian real estate but don’t lose sleep over it – CMHC

Canadians are going deeper and deeper into debt but that’s nothing to worry about


It seems that CMHC is the only organisation that is worried about housing market risks. We have covered them earlier here, here and here with the conclusion that as far as the indicators are concerned and even when CMHC itself issued its “red warning” alert, there isn’t sufficient hard evidence pointing out troubles in the housing sector. This is what I said about CMHC’s red warning report:

Let me be honest here. Even I was disappointed with the assessment. Taking example of Toronto and Canada, [CMHC concludes] it is overvaluation that is pushing the real estate in “red” category. HMA defines overvaluation as “The continued rise in house prices has not been matched by growth in personal disposable income giving rise to strong evidence of overvaluation.” I am not saying CMHC is wrong to define it like that but nobody else believes that over valuation is a problem. Hence, everyone ignored it except for the press and even some of them were scratching their head at why CMHC issued report in such a way.

I produced the mortgage arrears graph derived from CMHC data as well as percentage of high LTV mortgages outstanding. Looking at the data on standalone basis or even taking them together, there is no sign of stress in Canadian housing.

Mortgage arrears in percentages of outstanding
Distribution of CMHC home owner insurance and average outstanding loan amount

But then a tweep pointed out this

It could be HELOCs keeping mortgage arrears low

This was a risk raised by DBRS which I covered here

By their nature, there is also the risk that borrowers could use the lines and increase their debt to maintain their payments, if they are stressed by a loss of income due to unemployment or other causes.

But then DBRS concluded the report by saying

Currently, the Banks have capacity to absorb more elevated provisioning. At this time of low inflation, the worst case scenario for housing is increasing rates combined with rising unemployment. This scenario appears unlikely at this time.

Hence, as per DBRS there is nothing to worry about in housing..…yet.

But DBRS report had another graph which was frightening as far as debtors in GTA were concerned. Surprisingly DBRS was as unconcerned as to be sanguine about the whole situation

One indicator of the stress on home buyers from rising house prices is the high level and continued increases in the proportion of all insured mortgages that have loan-to-income ratios (LTIs) above 450%. The proportion of these high LTIs has been rising across all metro areas in Canada, particularly in the GTA and GVA (see Exhibit 3)

It would be great to see how the above chart looks when they add 2016 to it. Even now Toronto debt levels are really scary.


Now CMHC is back in the news with their stress test results. May be it is the way CMHC presents the result that no one care. People laugh it off. Probably it is by design. I don’t think anyone even remembers that a month ago CMHC issued a “red” warning about Canadian real estate.

Anyway, below scenarios were run and CMHC’s conclusion was

CMHC’s capital holdings are sufficient for even the most extreme scenarios

The earthquake scenario is horrendous but I want to focus on the last one i.e. 5% increase in the unemployment rate with a 30% decline in house prices. CMHC can withstand such a shock. May be. But can Canadians withstand such a shock? I would love to see the financial model which CMHC used because if there is a 30% decrease in housing prices, I don’t think the house of debt (literally and figuratively) us Canadians have built would be able to withstand it.

Later CMHC CEO made a speech at Bank of England where he shared some graphs which depending upon how you look at it can give you comfort or frighten you.

Household Debt-to-Personal Disposable Income Ratios

If I want to look at it positively, I’d say we are safe as Australian have much larger debt than us and there is no signs of bubble bursting in Australia. We can get more indebted before we start talking about a housing bubble. On the negative side, our indebtedness is higher than US and UK currently and almost reaching the levels just before the 2008 bubble burst.

But this graph below is scary

50% of net worth of Canadians is tied in housing. I look at above graph and look at the earlier graph of increasing LTI ratios of Torontonians (DBRS), it gives me the shivers.

CMHC CEO goes on to say

Politicians are tempted to help first-time home buyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macroeconomic vulnerabilities

He states further

Critics have called the proposal “a solution in search of a problem.” They cite low arrears rates in a Canada (0.33%) and our experience through the last financial crisis as proof that this proposal represents overzealous policy making. They don’t mention that the Canadian system has not been stressed since the Great Depression. Further, they choose to ignore the strong academic support that loudly warns against the drunken brew of elevated house prices and an advanced credit cycle.

Then he takes a jab at the low down payment culture

Further, research by Yale economist John Geanakoplos suggests that low down payments play a central role in escalating house prices. Politicians are tempted to help first-time homebuyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macro-economic vulnerabilities.

And finally

I have yet to be convinced that people in our country “need” access to 19:1 leverage to buy homes. In fact, it may be a fool’s bargain with the extra demand simply feeding higher house prices: the benefits of the policy accruing to wealthier home sellers rather than to the young first-time home buyers it purports to help.

But if you are thinking all this would have led to more actions or recommendations, you would have been disappointed.

While additional measures are not currently on the table, we will continue to be vigilant and monitor the housing market — and share our views as a policy advisor to Government — in order to ensure the long-term stability of the market and of the financial system.

This implies that CMHC will continue to make statements and issue red alerts which every one will forget the day after it is announced. No additional policy response is expected.

It should be noted that the above remarks were made by CEO CMHC in England, far away from the people it was supposed to scare (though the transcript is available on CMHC website).

Status quo is what the builders and financial institutions want. To be allowed to carry out business as usual

Policy-makers should hold off on any more changes to housing-market regulations until they gauge the effects of the most recent ones, and should turn their focus to building more rental housing, said Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal. “I think we should rest,” he said. “It’s good to discuss options, but at this point, I think that this market is taking a lot.”

So what the market is doing. Below are the flyers shared on twitter

I have magnified the flyer pictures below:

All you have to do is google the key words from the above flyer “real estate, seminar, secret strategies” and you will see all types of real estate scammers plying their trade of telling you how to make millions investing in real estate by using the secrets they will reveal to you once you attend that seminar. If it is such a secret, why are you giving it away? And the panelists aren’t there to help you make money, they are there to make money for themselves while at the same time get you deeper into debt.

But the shameless aspect of all this is that they are scaremongering you into buying a condo for kid who is 5 years old now (as per the picture in the flyer). 50% of net-worth of Canadians already tied in real estate and highest LTI ratio of GTA residents and then these guys come along and ask you to not only further concentrate your net-worth into real estate but also go into deeper indebtedness.

So who are the panelists: a condo builder, a mortgage specialist, a real estate lawyer, a real estate broker and a pre-construction condo advisor (whatever that means).

Condo’s were supposed to be selling like hot cakes with investors picking up 90% of the condo projects. My presumption is that investors are finally backing off so the condo builder is looking for other buyers for his project. The mortgage advisors as well as the lawyers want the gravy train to roll on. So what do they do? Scare monger you into buying a condo for a kid.

I would think this is one indicator that condo buying is slowing down as now stakeholders have to resort to such stuff to get people to buy condos. I hope the secrets they told people at the seminar are at least as good as the secrets learned from the below program


Though CMHC thinks there are risks in the housing market but they are not serious enough to demand additional intervention. Everyone else thinks that the market is doing great as it is and supply and demand is playing its role.

Personally I would stay away from buying a condo to invest in because condo builders have resorted fear-mongering to start selling them.

And I leave you with the below two graphs and like CMHC I will tell you, nothing to worry about here

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