Canada’s federal housing agency is considering scaling back mortgage underwriting practices to limit excessive borrowing due to the threat of significant declines in real estate prices and rising debt levels.
The combination of higher mortgage debt, declining property prices and increased unemployment is “cause for concern for Canada’s longer-term financial stability,” Evan Siddall, chief executive officer at Canada Mortgage & Housing Corp., said in remarks prepared for an appearance before the House of Commons Standing Committee on Finance in Ottawa. One fifth of all mortgages could be in arrears if the country’s economy hasn’t sufficiently recovered, he said.
“If there is an insurance claim, CMHC will be called upon to cover these losses,” Siddall said in the statement. “We are therefore evaluating whether we should change our underwriting policies in light of these market conditions.”
Canada is grappling with a dual shock of shutdowns from the pandemic and collapsing oil prices, and has already shed three million jobs since March. The economy probably shrank by 42% annualized in the second quarter, according to the median forecast in a Bloomberg survey.
Siddall said the agency feels the need to avoid exposing young people, as well as taxpayers, to “amplified losses” from falling home values. CMHC forecasts decline in average house prices of 9% to 18% over next 12 months, he said.
A first-time home buyer with a 5% down payment faces potential losses of C$45,000 ($32,000) on a C$300,000 home that falls in price by 10%, Siddall said. In comparison, a 10% down payment offers more of a cushion against possible losses.