CMHC Market Prediction and Retort

2 things to discuss; CMHC centres on both. First off is their prediction moving forward and second is their reaction and response directly to Capital Economics who predicted a 25% drop in the real estate market in the foreseeable future.

First off, Chief Economist predicts the housing market to move in lockstep with inflation, in relation to prices. Specifically Will Dunning said:

“Modest economic growth will continue to push employment levels higher this year and next. This, in conjunction with relatively low mortgage rates, will continue to support demand for new homes. Housing starts will remain in line with long term demographic fundamentals over the course of 2011 and 2012,”


Mr. Dugan also noted that the existing home market will remain in the balanced to sellers’ market range in 2011 and 2012. As a result, growth in the average MLS® price is expected to remain in line with economy-wide inflation in 2011 and 2012.

Many people argue (especially on various message boards) that CMHC’s role in this is the same as CREA’s - that is, to hype up the market, or keep it afloat. I believe the contrary is true. Yes, CMHC is a for-profit Crown Corporation, and does quite nicely for the Canadian Government (in 2004 it had revenues of $4.6B CAD, and yes, that number has grown since then). That being said, I don’t believe it’s sole purpose is to make sure the housing market stays afloat. The role of CMHC is to assess each loan given to it, and to lend on it. Furthermore, it has a very solid management team that ensures the market fundamentals are such that the loans will be paid. And they are paid! 1% of mortgages in Canada are overdue. One single percent. So before you cry foul that CMHC’s role…


Why Do We Even Have Mortgage Insurance?

As many of you know, 35-year amortization is on the outs starting March 18th, thus reducing the amount that people will pay in mortgage insurance. A bigger question is, why do we even have it and what purpose does it make in our market? Simple - it is insurance for the bank. Anything below 20% down is considered “high-ratio” and to some extent, high risk for the lender. Note a client putting down only 5% on a $400,000 house, first-time buyer. Let’s say they get caught up in a market downturn, value goes to $360,000. Suddenly the mortgage is worth more than the house! The bank does not get their money back, however, unless the client does not pay their mortgage - and in Canada the rate of delinquent repayment is approximately 1% (quite a contrast to the 30% or so being talked about in the news in the US). Nonetheless that 1% can make up a large loss for a bank should the client default - in steps CMHC, who has guaranteed the loan to the bank. This helps the client in getting the mortgage in the first place, since (almost) no lender would be willing to take on risk like this on their own!

CMHC gives 100% insurance to the banks on loans it insures, whereas Genworth provides only 90% insurance (since it’s not a Crown Corporation). Recently the CD Howe Institute released a paper on lowering the risk premiums that we pay, and upping the Genworth insurance to 100% to make it an even playing field (for those interested, Genworth is a publicly traded company  on the TSX).


How My Clients Paid Off A Mortgage In 9 Years.

I went recently to visit a client whose son was stepping into the property game, buying his first condo apartment at a modest $240,000. We got to talking and I asked about the parent’s mortgage situation and was told there was no situation. It was paid off to $0.00. In 9 years. Quite amazing when you consider the panic in the market for people to “sneak into” 35-year amortized mortgages. Now, some of you may say “well they bought for less” or “they had money” or any other common argument, which isn’t true. Let me explain the scenario.

They bought the house in 2001, as the housing boom started. They put down hard-earned 20% to avoid CMHC. They paid $250,000, which still left them with $200,000 to pay off. They have 2 kids who were starting University (and not in their city) to pay for as well. What did they do? Simple; sacrifice.

When I looked around their home, I didn’t notice a flat-screen TV. There was no double-wall oven with Scavolini cabinets. Missing was the 7 seater SUV in the driveway. What I saw instead was a good case of financial prudence. The best thing about them was their pride - it was wholly evident on their faces, as it should be. When I walked away I wondered to myself how many of their neighbours that lived on their street could say the same? Probably very very few.



I received an email from a concerned buyer the other day asking me about the march 18th deadline. She is a first-time buyer with a full-time job along with her own side-business in the same industry. Her concern was that she is looking for a condo and wants to get 35-years amortization on mortgage, but, the closing date will be April 1st 2010, after the deadline.

My response is as follows:

“Hi, as long as your offer acceptance date leaves us enough time to arrange the mortgage financing, and CMHC has approved you before the deadline, you’re okay to proceed with the closing date of April 1st or beyond”.


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