Regulators should explore boosting minimum down payment: CMHC

TORONTO – The head of Canada’s federal housing agency says regulators should explore the possibility of raising the minimum down payment required on a home as a way of easing affordability and reducing risk to the financial system.

“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,” said Evan Siddall, president and CEO of Canada Mortgage and Housing Corp.

During a speech at the Bank of England’s offices in London Friday, Siddall said that low minimum down payments fuel housing demand and lead to higher housing costs.

That ultimately ends up hurting the young, first-time homebuyers that such policies were purportedly designed to help, Siddall said.

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Boosting the minimum down payment could help offset the effects of rock-bottom interest rates, which have encouraged borrowers to take on excessive mortgage debt, he added.

The federal government has introduced a number of measures aimed at curbing risk in the real estate market.

Most recently, Finance Minister Bill Morneau announced that stress tests will be required for all insured mortgages to ensure that borrowers would still be able to make their mortgage payments if interest rates rise or their financial situations change.

And last year, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10 per cent.

“We expect that these macro-prudential policy changes will moderate demand for housing in Canada’s housing markets, limiting price increases and making houses more affordable,” Siddall said.

He added that regulators should also explore the possibility of imposing a loan-to-income limit, which would restrict the size of loan that borrowers could qualify for based on their incomes.

A number of jurisdictions including Ireland and the U.K. have introduced such limits.

Siddall also slammed critics of lender risk sharing, a proposed policy that would limit taxpayers’ exposure to the mortgage market by having banks shoulder more of the risk.

The Department of Finance recently launched a public consultation on the proposal, which would see banks pay a deductible on government-backed mortgage insurance.

“Critics have called the proposal ‘a solution in search of a problem.’ They cite low arrears rates in Canada and our experience through the last financial crisis as proof that this proposal represents overzealous policy-making,” Siddall said.

“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.”