Just a few months ago, the national discussion was about house prices and a lack of affordability. No longer, with houses, townhouses, and condominium prices cresting, imminent data may likely confirm serious price declines. Mortgage carrying costs are rising, as interest rates and debt servicing costs climb. The mortgage qualifying threshold is receding rapidly for many.
Interest rates on five-year fixed mortgages has already doubled, climbing to over five percent. Already, a rising number of people cannot qualify for a bank mortgage. Rising interest rates hamper house buyers applicants, particularly for those with erratic or short employment history, or have a too low down payment. More house buyers will have to rely on either mortgage insurance or assistance underwritten by CMHC (a federal Crown corporation) to get their loans from their bank or credit union.
While CMHC’s mandate is to help potential home buyers to achieve their home ownership dream, it backs some of the riskiest and most marginal home buyers. CMHC forecasts that any substantial increase in Canada’s unemployment rate would affect housing prices and mortgage loan delinquencies. Canada’s economy may already sliding into recession, risking increased unemployment and falling home prices CMHC’s now-healthy financial situation could be wiped out entirely, by just a three percent rise in unemployment to 8.1%, bringing a 20% decline in average home prices.
Canada’s price housing index has jumped 50% in the past two years, so a retreat of just over half of that rise is not overly pessimistic. Such a relatively mild, in historical terms, recession, CMHC suggests could wipe out 75% of Ottawa’s equity in CMHC. Since interest rates are likely to rise significantly before subsiding, the impact on CMHC’s finances could be even worse than current sensitivity analysis indicates. That is, if the effects are worse than expected and unemployment soars (as it did in 1981-82).
It is unclear if the federal government, and by extension, taxpayers, are doing higher-risk, lower-income mortgage debtors any favours by helping them to buy barely affordable homes. Crucially, if they are lower-paid, first-to-be-fired employees working in economically sensitive industries, vulnerable to layoffs, then their then-inability to service mortgage payments could well skyrocket.
A 2017 study by the Frontier Centre estimated that CMHC’s potential divested value could be in the range of $12 billion to $27 billion. The estimates used by Frontier were market value comparisons (price/earnings; price/book; similar metrics) and an intrinsic (discounted cash flow) method.
However, these valuations of CMCH would not hold in the case of a major recession with job losses and crashes in the greater Toronto and Vancouver housing markets, making CMHC’s value plummet. While there is surely a place for higher-risk mortgage lending or mortgage guarantees, private firms, with a keener interest in survival without bailouts, and no public interest role foisted on them, can fill the role.
Already such companies exist. The next housing slump may not be fatal for CMCH, but it might. CMHC should be sold, the sooner the better.
Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy
