If the housing market crashed, how would Canadians weather it? Without some changes, not very well, according to a recent report by the C.D. Howe Institute.
“In an era of rising house prices and high mortgage debt, heightened concern over the potential exposure of Canada’s mortgage insurance system — and taxpayers — is merited,” reads the report’s brief.
Higher Risk Buyers On The Rise
With the prices of homes reaching new highs, few homebuyers can pay the 20 per cent down payment that exempts buyers from requiring mortgage insurance. There’s currently $1.2 trillion in outstanding mortgage debt in Canada and more than half of that is backstopped by Canadian federal insurance. Translation: in the wake of a crash and employment losses, thousands of Canadian homeowners would be unable to make their monthly mortgage payments and Canadian taxpayers could be left to cover $9 billion in losses. This is especially acute in Canada’s hottest markets where affordability is increasingly steep.
Also read: What is CMHC Mortgage Insurance?>
The report recommends reforms that would “better position the Canadian mortgage insurance system to address the risk of a severe housing crash”:
- The Canadian government should create an independent fund that accumulates reserves to be used in the case of widespread mortgage payment defaults. An additional 10 per cent surcharge on mortgage insurance would help build the fund up.
- This new, independent fund should be overseen by Financial Institutions Supervisory Committee (FISC). FISC would also play a regulatory role, designing and administering an annual “stress test” of the Canadian housing finance system that would help, in part, “set baseline premiums so that the expected premiums collected equal the expected losses.”
- This mortgage insurance backstop should only be available to residential homeowners.
Crash Concerns Aren’t Immediate
While the report’s authors — economists Thorsten Koeppl and James MacGee — caution against the effects of a housing collapse, they don’t believe such a catastrophic crash is imminent.
In a phone interview with the Toronto Star, MacGee was quoted as saying “We don’t think that we’re on the edge of a housing crisis today. But what we take away from what happened to housing markets in countries like the U.S. and Ireland is that we need to design a policy framework now so that if a crisis happens in the next decade or so, we’re ready for it.”