Boom. CMHC makes more announcements. Here are the technical details, followed by what this all means and my commentary, how this may affect the market.
Effective July 1, CMHC insured mortgages:
- The maximum gross debt service (GDS) ratio drops from 39 to 35
- The maximum total debt service (TDS) ratio drops from 44 to 42
- The minimum credit score rises from 600 to 680 for at least one borrower
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes
Additional clarification:
- Essentially affects owner occupied purchases, less than 20% down payment
- The debt ratios translate to purchase power decrease by up to 11%
- Non-traditional sources of down payment included unsecured personal loans or unsecured lines of credit. Still ok is savings, the sale of a property, or a non-repayable financial gift from a relative
- Official reason: “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
My commentary:
- July 1 deadline will create temporary frenzy with buyers.
- This change grossly affects first time home buyers. 61% of these buyers buy with less than 20% down, which means they have to go through mortgage insurance.
- Inevitably, this will shut out some buyers completely out of home ownership.
- This means more renters. There is already a rental housing shortage. Rents will not become more affordable as a result, contrary to the ‘affordable housing’ government mandate. Additionally the government has not made it any easier for landlords and rental property financing, aggravating the situation. Minimal incentive to add to rental housing stock.
- There may be more competition for lower priced homes outside of higher priced cities, to match with the new debt ratios.
- Last month CMHC floated the idea of minimum 10% down payment. Today’s announcement is another way to slice the same cake.
- It’s like increasing the current stress test rate by about 1.3%.
- The other two private insurers, Genworth and Canada Guaranty are not directly affected. Early indications seem to suggest they will not follow, but this still is being evaluated, no additional information at this time. Perhaps there will be some healthy market competition.
- Is the ‘non-traditional source of down payment’ a reasonable concern? Based on a Feb 2020 survey, only 2% of down payments for CMHC insured borrowers with loan-to-values above 90% were from ‘non-traditional sources’.
- CMHC standing firm on their controversial estimate last month of 12 month house price decrease of 9 to 18%….It’s like they want this to happen based on their policies, and make right with this statistic.
For real estate investors, another game changer:
CMHC suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. “Consultations have begun on the repositioning of our multi-unit mortgage insurance products.” So, not much more details given at this time, as you can see, but major game changer.