October 19, 2016

What the CMHC Red Warning Means for Home Buyers

Consider yourself warned, home buyers; a “red” status is on the way for the national housing market, according to the federal mortgage insurer.

The Canada Mortgage and Housing Corporation (CMHC), announced this week that it intends to issue the highest level of warning for Canadian real estate in its Housing Market Assessment, due on October 26. It’s the first time such a grade has been given to Canada’s entire market, and indicates unaffordable home prices are spreading from the hottest cities to other, smaller markets.

“CMHC has recently observed spillover effects from Vancouver and Toronto into nearby markets,” said CEO Evan Siddall to the Globe and Mail. “… They will cause us to issue our first ‘red’ warning for the Canadian housing market as a whole.”

He adds that the growing number of Canadian households struggling with large mortgage and debt obligations make the nation vulnerable to an economic downturn, stating, “The conditions we now observe in Canada concern us.”

This risk has been steadily rising along with home prices; the CMHC has already upgraded Canada’s level from weak in April to moderate in July. This is in addition to rankings it gives individual regions: Calgary, Saskatoon, Regina, Vancouver, and Toronto real estate markets have already been pegged as troubled. 

More Risk Means Fewer Mortgages

Higher risk will make it tougher to buy a home; the federal government is already reacting with new measures designed to tighten the market. Earlier this month, new mortgage qualification rules were introduced to prevent overly-leveraged borrowers from taking out mortgages. As of October 17, all borrowers paying less than 20% down on their home purchase will now have to pass a mortgage stress test, qualifying at a rate of 4.64%, which is nearly double than today’s lowest mortgage rates.

It will also be tougher for lenders to obtain mortgage insurance for these higher-risk borrowers.

As fewer new mortgages will now qualify for mortgage insurance, these lenders, who often rely on selling pooled insured mortgages as investments for funding, will have less cash flow. As a result, they won’t be able to fund as many mortgages, and will hike their fixed mortgage rates.

These limitations are part of the government’s risk reduction plan, as higher rates and fewer buyers will take some of the pressure off real estate demand, and, eventually, real estate prices.

Some Relief for the Bank of Canada – and Your Variable Mortgage Rate

However, these changes are giving the Bank of Canada, which is tasked with keeping the economy stable, a bit more breathing room. The central bank, which manipulates interest rate pricing for the big consumer banks, has been keeping its rate at a record low 0.5% in efforts to boost the economy – but it has been hesitant to lower its rate further as doing so would fuel risky borrowing. Now, it’s expected the new rules will offset a spike in borrowing caused by a rate cut. While the Bank opted to keep its rate at 0.5% in today’s announcement, this could mean it may be in a place to lower it again in the future – and slightly lower rates for variable mortgage borrowers.

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