CMHC sheds risk in the condo market
After raising the alarm about potential house price drops of 9 to 18% over the next year or two, it seems the CMHC is hell bent on trying to shed as much as risk as it can. Although much of their insurance portfolio can’t be changed on such short notice, they are clearly trying to stop new risk from piling on by reducing available leverage for new insured loans.
After discussing the prospect that 10% minimum down payments would really reduce risk, they went ahead with a different set of changes which go into effect July 1st. They boil down to:
- Reducing the maximum Gross Debt Service ratio (GDS) from 39 to 35.
- Reducing the maximum Total Debt Service ratio (TDS) from 45 to 42.
- Increasing the minimum credit score of at least one borrower from 600 to 680
- No longer allowing borrowed down payments.
How big of an impact will this have on the housing market? Well as usual it’s not a simple answer. For single family homes it likely won’t have a big impact at all. With the median house most recently going for $835,000, a CMHC insured loan on that with less than 20% down would be north of $668,000. For a mortgage of that size with current stress testing rates a buyer would need an income of over $135,000 and very little other debt. That high requirement has pushed more buyers to increase their down payments beyond 20% and thus would not be affected by any CMHC rule changes. Buyers with a lower income would likely be upgrading from another home and have accumulated some equity to avoid CMHC insurance.
The condo market would have been more affected, if the other insurers (Genworth and Canada Guaranty) had followed suit. In the past, they have almost always followed CMHC’s lead on underwriting standards, and there are very few differences between their offerings. However just now Genworth confirmed they won’t be tightening their guidelines to match CMHC. That means instead of sidelining a lot of buyers, this rule change may simply transfer a lot of business over to the so called private insurers if those insurers can pick up the slack which is not guaranteed. The government though provides a 90% backstop to those insurers, and I imagine there will be some pretty frank conversations in the coming weeks about whether that backstop will continue for insurance provided on loans that the government itself is no longer willing to insure.
CMHC meanwhile has really pulled back their exposure with all the recent changes. Mortgage broker and friend of the site Mike Grace has worked out a summary scenario of what all these changes could mean for a hypothetical buyer. In the chart below, we follow a buyer with an income of $63,000 in 2016 who is looking to buy a condo. At that time our buyer could buy a condo up to $350,000, which was comfortably above the median of $310,000. The next year CMHC cranked mortgage insurance premiums, but the assumption of a modest 2% gain in income allowed that borrower to stretch to a $356,000 property. Then the stress test hit, and suddenly the same borrower could only afford $290,000 in 2018. Two years later the new CMHC changes bring that total down to a maximum purchase price of $268,000. The first time home buyers program introduced last fall only brings that up slightly.
So despite 4 years of income gains, this buyer’s maximum purchase price has dropped substantially in a time when the median condo price increased by 37%. The stress test removed about 25% of buyers from the condo market with a cut in buying power of about 20%. The new rule changes cut buying power by about half as much, but with today’s announcement from Genworth it remains to be seen how many buyers will actually be removed from the market.
Condo buildings that have had substantial insurance increases also affect qualification for buyers, since half of the condo fees are factored into the GDS calculation as housing costs. The condo market as a whole has already shown a lot more weakness than the detached market, with sales still down steeply while new listings are coming on board faster than this time last year.
Some have raised the concern that this pro-cyclical tightening is a bad idea and will compound price declines. I’m surprised that they’re doing this now and not 12 months from now when the market has stabilized, however it’s not exactly out of character for CMHC. In 2008 they similarly went on a spree of credit tightening measures to counteract the drop in interest rates, bringing the credit market back from 40 year zero down mortgages to where we are today in a number of gradual moves over the last decade. Either they see risk that others don’t and they want to reduce their exposure, or they know that the previously scheduled easing of the stress test will move ahead soon and they’re trying to get ahead of it by tightening other restrictions to avoid juicing the market.
Unemployment past peak in Victoria
You won’t know it from reading the local news, but unemployment is past the peak in Victoria and headed down again. It seems most have still not figured out that labour force statistics for Victoria are reported on a 3 month average, causing the media to puzzle about why Victoria hasn’t reflected any of the provincial employment gains. I’ve updated my estimate of the true unemployment rate based on provincial changes in employment by industry for Victoria’s market in the chart below. By that measure, effective unemployment in May was 15.3%, down from 18.1% in April.
The Labour Force Survey is done in early May before we hit Stage 2 in BC, so expect another large drop in the effective unemployment rate when the June data is released.
New listings fully recover while sales lag
New listings have now fully recovered from the pandemic slump, most recently coming in at 5% above the rate of last year. We will likely see the effect of some pent up supply by sellers that intended to sell in the spring but are listing now instead. Sales meanwhile are still down some 30%, however it’s a highly tilted market, with the detached market much tighter than condos. In the last two weeks, nearly one in four detached properties sold for over the asking price, compared to only 10% of condos. There are certainly no pandemic deals to be found in most of the detached market right now.
Also weekly numbers courtesy of the VREB
|Wk 1||Wk 2||Wk 3||Wk 4|
|Sales to New Listings||33%||61%|
|Sales YoY Change||-41%|
|Months of Inventory||4.1|
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