First Quarter News From CMHC

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Part I - Hiking Rates

For the third time in four years, the Canada Mortgage and Housing Corporation (CMHC) recently announced it will again increase mortgage insurance premiums, which would average an additional $5 per month ($60/year) for the typical insured mortgage.

The increase will apply to newly insured mortgages only and will take affect on St. Patrick's Day (March 17th), 2017.

The move is in direct response to stricter changes made legislation, which were outlined in our January post found here

It's one piece of a much broader undertaking to make the mortgage industry more responsive to what regulators view as potential risks to the housing market.

Historically, home buyers with less than a 20% down payment were mandated to take out mortgage insurance so lenders would be covered in the event of defaulting on payments. Payments would typically be rolled into the borrower's monthly mortgage payments.

The new changes coming next month will affect more than those with small down payments. They will actually be more significant for home buyers with bigger down payments.

Buyers with a 5% down payment will have their premiums increase by 40 basis points. Those with a 15% down payment will have an increase of 100 basis points (a basis point is one one hundredth of a percentage point.)

To put that in more relatable terms, if a buyer has 5% down for a $150k mortgage, it will cost just under $3 extra per month. On an $850k mortgage, even with 15% down, the new change will boost the monthly mortgage insurance premium by an additional $40. This totals $480 per year, just to cover the upcoming increase on insurance premiums..

About two-thirds of borrowers who need the insurance have less than 10% for their down payment. Combine that with mortgage rates that have gone up approximately 50 basis points over the past three months and much tighter approval restrictions implements last Fall, and home buyers are left trying to plan how to bring it all together.

First time home buyer's, especially in Canada's booming hot spots in and around Toronto and Vancouver, will probably be shell shocked when they try to enter the housing market. It would be fair to say that it's the most difficult time to enter the market in the last decade, with little show of reprieve in the imminent future.

Positioned as the dominant government-owned mortgage insurer, CMHC sets the benchmark price in the industry and historically initiates any rate changes. It's expected that private-sector insurers will follow CMHC's lead and adjust their premiums, as well.

It's a rather telling story of the bustling real estate activity and rocketing home prices in pockets of Canada, when the third increase to insurance premiums is announced in a rather small space of time compared the past decade, as a whole.

CMHC also piggy-backed another announcement that non-traditional insured mortgages (ie where a down payment has been borrowed), would also see a premium increase.

Part II - Q1 Housing Market Assessment

CMHC has released its first quarterly report for 2017, which contains good news and not so good news. Their evaluation is based on four factors, which include overheating, price acceleration, overbuilding, and overvaluation.

The report consists of a "report card" of sorts, of 15 Canadian urban centres. Canada overall, is then weighted on this data. As with any statistical data, using a base for measurement and applying the findings across a much larger scale can lead to some skewing in both directions.

Below are a few highlights and red flags:

Calgary's residential market's risk rating has been downgraded from "strong" to "moderate".
A more balanced market is expected in Calgary for 2017, coming off the heels of a "buyer's market".
There's was a 1.3% increase of Adults 25 to 34 in the Calgary area in Q3 2016 versus year over year.
Calgary's single-family home benchmark price was down 3% last year compared to 2015($505,166 versus $521,958). Source: Calgary Real Estate Board.
Cities with a "strong evidence of risk" rating include Victoria, Vancouver, Saskatoon, Regina, Hamilton and Toronto.
Vancouver and Toronto are the culprits for strong price growth being spread to neighbouring areas (including Hamilton and Victoria).
St. John's, Halifax and Ottawa, have been pegged for moderate overbuilding for the past two quarters, but have been given a thumbs up for overall health/
Overvaluation and overbuilding remain the most prevalent problematic conditions across the 15 markets studied.
House prices in Canada increased by 7% year over year, at the end of 2016's third quarter.
If Ontario was removed from the calculation, house prices would be flat through to the third quarter.
The data shows that new home construction was off to a strong strong start in 2017, with 199,834 units started in January, up from 197,881 in December.
Ontario "starts" continue to drive the national trend upwards and BC has seen a slow down since last July, when it reached a near record high.

The CMHC’s quarterly Housing Market Assessment (HMA) is regarded as an early warning system, alerting the industry to areas of concern developing in housing markets so that they may take action in a way that promotes market stability.

Part III - The "What If's"

If home prices were to correct in the Greater Toronto Area (GTA), other Ontario markets would take a hit, says Canada Mortgage and Housing Corporation's most recent Housing Market Insight report.

Some highlight excerpts from the report include:

Shockwaves would be tied to what the national housing agency calls “price spillover,” which occurs when high home prices in a certain market send buyers packing for cheaper municipalities. This has been most obvious in the pricey single-detached segment, which includes detached and semi-detached homes.
Recently, buyers have been shifting attention to even farther flung markets, including St. Catharines-Niagara, which was recently named one of the tightest resale markets in the country.
CMHC says the correlation it sees between the GTA and surrounding markets in terms of price growth suggests “some potential buyers are unable or unwilling to purchase an apartment in the GTA, and are instead choosing to purchase a property in a nearby CMA when GTA low-rise home prices rise.”
The average price of a detached home on the GTA’s resale market last month was $1,016,145, representing an increase of 23.1% from a year prior, according to the Toronto Real Estate Board.
Builders have been completing fewer detached homes in recent years as demand persists.
There were only 789 new detached homes up for sale across the GTA at November’s end, the Building Industry and Land Development Association states, and the average listing price for that housing type reached $1,230,962 that month, up 27% year over year.
Price spillover can work both ways and with GTA prices driving home values in other Ontario markets, if there were to be a correction, it could also result in a pull back the same surrounding markets.

CMHC estimates if home prices dropped 1% in the GTA, Hamilton's prices would be affected by 1.4%. A 10% correction, in theory, could slice 14% of Hamilton home prices. CMHC is careful to state "these are in no way predictions,” in a news release.

In Summary

Canada's still experiencing a pretty hot housing market in the bigger urban centres. With lots of speculation that it "can't last" and the "bubble's got to burst", time will tell exactly when that is, as there's not a lot of slow down quite yet. Time will also tell how much impact last Fall's new legislation, coupled with CMHC's new mortgage insurance premium increase announcement will have overall.