Supporting Financial Stability During the COVID-19 Pandemic

Speaking Notes for Evan Siddall

Standing Committee on Finance

Ottawa, Ontario

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Thank you, Chair, for this opportunity to update the Committee on how CMHC is helping to stabilize Canada’s financial system and support the economic well-being of households and small businesses during the COVID-19 pandemic. My appearance before you today is also timely in informing you about new measures we are contemplating to promote housing affordability and to reduce risks to CMHC and to our economy.

Early in the crisis, in co-ordinated action with the Bank of Canada and the Department of Finance, we relaunched the Insured Mortgage Purchase Program. This tool helps ensure that banks have access to reliable term funding so they can continue their lending activities and housing markets remain functional.

Under the current revised program, we stand ready to purchase up to $150 billion of insured mortgages. We are also prepared to expand the issuance of conventional securitization programs, as needed.

In addition, we acted quickly to help Canadians who are having difficulty paying their mortgages or rent due to income loss because of COVID-19. In co-ordination with private mortgage insurers, we are offering temporary deferral of mortgage payments for up to six months. We estimate that 12 per cent of mortgage holders have elected to defer payments so far, and that figure could reach nearly 20 per cent by September.

The same mortgage deferral relief is available to our multi-unit clients in order to facilitate rent relief for their lower-income tenants. And we have taken steps to ensure that non-profit and co-operative housing providers continue to receive federal rent subsidies for low-income tenants, even if their current agreements with us have expired. In both cases, we have insisted that recipients of federal support refrain from evictions during the crisis.

Most recently, the Prime Minister announced that CMHC will administer the Canada Emergency Commercial Rent Assistance for small businesses. The program will lower rent by 75 per cent for small businesses affected by COVID-19. While the program is not housing related, we are pleased to use our real estate expertise to help struggling entrepreneurs.

However, as the Committee is no doubt aware, almost everything we have done in response to the crisis involves borrowing. Just as governments are taking on more debt to finance the COVID-19 response, mortgage deferrals are adding to already historic levels of household indebtedness.

Canadians are among world leaders in household debt. Pre-COVID, the ratio of gross debt to GDP for Canada was at 99 per cent. Due in part to increased borrowing but even moreso to declines in GDP, we estimate it will increase to above 115 per cent in Q2 2020 and reach 130 per cent in Q3, before declining. These ratios are well in excess of the 80 per cent threshold above which the Bank for International Settlements has shown that national debt intensifies the drag on GDP growth.

Looking at debt multiples of disposable income, that measure will climb from 176 per cent in late 2019 to well over 200 per cent through 2021. Moreover, CMHC is now forecasting a decline in average house prices of 9 – 18 per cent in the coming 12 months. The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability.

A team is at work within CMHC to help manage a growing debt “deferral cliff” that looms in the fall, when some unemployed people will need to start paying their mortgages again. As much as one fifth of all mortgages could be in arrears if our economy has not recovered sufficiently.

We feel we need to avoid exposing young people (and through CMHC, Canadian taxpayers) to the amplified losses that result from falling house prices. Unless we act, a first time homebuyer purchasing a $300,000 home with a 5 per cent down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10 per cent. (Our calculations include the mortgage insurance premium and the costs of selling the home if forced to do so because of unemployment or any other reason.) In comparison, a 10 per cent down payment offers more of a cushion against possible losses.

If there is an insurance claim, CMHC will be called upon to cover these losses. We are therefore evaluating whether we should change our underwriting policies in light of these market conditions.

Our support for homeownership cannot be unlimited. Homeownership is like blood pressure: you can have too much of it. Housing demand is far easier to stimulate than supply and the result, as we’ve seen, is Economics 101: ever-increasing prices. So if housing affordability is our aim, as surely it must be, then there must be a limit to the demand we help to create, especially when supply isn’t keeping up.

People believe that owning a home is essential for retirement savings. Indeed, over the past 20 years, the average Canadian homeowner has had a tax-free gain of $340,000 in the value of their home. That sounds great, until we add in the fact that $300,000 of that gain has been created by increased borrowing. These house prices and debt levels are increasingly out of reach for young people. Homeownership actually tends to be lower in countries with higher incomes.

In addition to restraining our underwriting practices to limit excessive borrowing, we must also take decisive, urgent action to accelerate the supply of rental housing. CMHC has already taken steps to accelerate the delivery of funding under the National Housing Strategy, which is very much focused on creating more affordable rental housing for Canadians. The federal government is contributing billions of dollars to housing, along with provinces and territories. Municipalities can continue to help by accelerating affordable housing approvals, contributing land and/or waiving fees and taxes to support the development of affordable housing — as well as revising property tax regimes through a lens of impacts on housing affordability.

At CMHC, along with my 2,000 colleagues, we remain fully committed to our aspiration that by 2030, everyone in Canada has a home they can afford and that meets their needs. COVID-19 has brought the value of stable shelter into sharp relief, strengthening our resolve.

Thank you, Chair. I look forward to joining my colleagues in answering any questions the Committee may have.