Wondering why?

By Garry Marr, Financial Post August 7, 2013

 Last week, realtors in both Vancouver and Toronto released results showing a strengthening market. Toronto July sales were up 16% from a year ago and Vancouver 40%.

The latest tightening of mortgage rules might come down to a couple of thousand dollars for the average Canadian consumer but that still has many wondering why Ottawa is cracking down once again on housing.

Don Lawby, chief executive of Century 21 Canada, said if the latest changes raise borrowing costs, housing is going to get more expensive.

“In the eyes of the government, housing must be out of control again, but I don’t see it,” he said, adding the warning, “if you push hard enough, there will be a correction.”

CMHC has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350-million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.

The federal Crown corporation was given authority to guarantee up to $85-billion this year under the program — of which about $66-billion was committed by the end of July and approaching the total of $76-billion in all of 2012.

Ultimately, the limit will increase bank funding costs because insured mortgages held on balance sheets under the NHA MBS are easier to securitize. More expensive funding will just be passed on to homeowners.

The move comes as the housing market has shown some nascent signs of taking off again. Last week, realtors in both Vancouver and Toronto released results showing a strengthening market. Toronto July sales were up 16% from a year ago and Vancouver 40%.

Rob McLister, editor of Canadian Mortgage Trends, downplayed the latest changes and said they amount to about 20 basis points or 0.2% percentage points on a five-year mortgage.

“At that rate it’s $1,900 on a five-year fixed rate, $200,000 mortgage. It’s real dollars and cents to most consumers but I don’t think it’s going to have a real dampening effect on credit,” he said.

Mr. McLister said he has heard that some larger lenders were asking for big guarantees on some of their pools “and that made the powers that be nervous” and led to the crackdown.

The decision likely has been dictated by Finance Minister Jim Flaherty, whose department took control of the program after recent changes to the National Housing Act.

Mr. Flaherty in the past has expressed concern about the housing market being overheated, and has tightened mortgage rules on four occasions. His department even got directly involved in the lending market, discouraging the major banks from engaging in a rate war that lowered five-year fixed mortgages below 3%.

Peter Routledge, an analyst with National Bank who says the latest changes could add anywhere from 0.15% to 0.45% percentage points to the mortgage rates, said he’s been expecting more changes but not right away.

“I thought with the changes they made last fall, that they were done,” said Mr. Routledge. “I’m a bit surprised by the timing. I’m surprised they didn’t wait for a couple of more months of data.”

He also wonders whether Ottawa is reacting to the past mortgage rate wars that occurred in March. “There was the price war. Put yourself in the government’s shoes as a stakeholder. About 62% of residential credit is insured. Who is holding the bag if it goes bad? Most of the credit risk lies with the federal government,” said Mr. Routledge. “You are trying to progressively manage the flow of credit without damaging the value of the underlying collateral which is [potential] loss to the government in home prices.”

Doug Porter, chief economist with Bank of Montreal, wonders if housing statistics over the last couple of months showing sales and prices rebounding might have spooked the CMHC.

“I think this step is being taken because we have seen some signs in recent weeks that the market is not cooling as much as had been expected,” said Mr. Porter. “All the debate has been whether we will have a soft or hard landing and I would question whether the market had any landing whatsoever.”