Forecasting with precise accuracy is difficult to do, and nearly impossible to do on a consistent basis. Yet there is no shortage of said forecasts as we head into 2019. Many of these forecasts come from within the Real Estate industry, most with an underlying objective or bias that comes naturally when your job or stock price depends on it.
While I will stop short of providing another forecast, I think there are perhaps better indicators to watch moving forward, many of which come from the very regulators who control the policy levers that can move real estate prices on a meaningful level.
Recent actions and communication from policy makers including the Bank of Canada, OSFI, and CMHC all suggest a further desire to curb household borrowing and contain the runaway housing market.
Here are a few things to watch from policy makers/ regulators in 2019:
The Bank of Canada
The Bank of Canada has recently taken a step back from the rate hiking path, with market odds suggesting the Bank of Canada could be done for good. While this is certainly possible, it has sent the Canadian dollar into a downwards spiral, dropping about 7% against the US dollar this year. More importantly, however, is what the Bank of Canada is quietly doing behind the scenes. Just over a month ago the Bank announced they would begin purchasing Canada Mortgage Bonds. On December 13, the Bank of Canada made history, purchasing $250M worth of Canada Mortgage Bonds for the first time ever. This is important for a number of reasons. While the Bank of Canada maintains the purchase of said bonds is just regular maintenance of their balance sheet, the timing of the purchases is a likely sign of what’s to come. The Bank is well aware of the elevated risks across highly indebted households and within the housing market across Canada. In the event market volatility begins to increase and markets demand higher risk premiums, the yield on Canada Mortgage Bonds and similar securities which are sold to increase bank funding will widen. This will result in more expensive borrowing costs to banks and in turn will filter down to higher rates and or tighter lending to households. Therefor in order to maintain liquidity and ensure borrowing costs don’t rise beyond acceptable levels, there is a strong likelihood the Bank of Canada will need to purchase Canada Mortgage Bonds at a much larger scale, particularly in the event the housing market slides further. The recent purchases from the Bank could therefor be viewed as them front running the market so as not to scare the market when mortgage bond purchasing ramps up.
OSFI hasn’t shown much desire to curb the mortgage stress test which was implemented across all borrowers beginning in 2018. In fact, OSFI has been keeping a close eye on financial institutions and has more recently demanded several lenders to reign in and begin stress testing home equity lines of credit. With the housing market turning down, it is likely OSFI, which is responsible for the financial stability and integrity of financial institutions to be quite proactive in 2019. Removing the mortgage stress test therefor seems unlikely at least in the near term, despite the best attempts from real estate developers to have it repealed.
CMHC, whether they want to admit it or not, has been a significant contributor to elevated home prices. The federal agency was initially created to provide shelter for army veterans returning from the war, before their mandate switched to providing affordable housing to Canadians. Somewhere along the line, and rather unofficially, they became responsible for insuring nearly $500B worth of mortgages and guaranteeing an additional several hundred billion through NHA MBS (National Housing Act Mortgage Backed Securities) and Canada Mortgage Bonds. However, since the hiring of current CEO Evan Siddall, they have been adamant about reducing their exposure, which is ultimately tied to the Canadian taxpayer. The number of insured mortgages has plummeted from 59% in January 2013, to just 39% today.
Evan Siddall has also been a big supporter of the mortgage stress test. He frequently references the book House of Debt, written by Atif Mian and Amir Sufi and it’s clear through the recent changes at CMHC that his playbook is largely influenced from the research of Mian & Sufi who emphasize that the larger the credit boom, the larger the resulting bust and ensuing hangover. House of Debt puts a significant emphasis on risk sharing with mortgage lenders which of course directly conflicts with CMHC insuring mortgages.
Evan Siddall has made some recent public comments on his Twitter profile which likely foreshadow what to expect moving forward. In a recent response to the Mortgage Professionals Canada who suggested the stress test be removed and or revised, Siddall hastily replied “All that’s been done is that we have halted the dangerous march to even higher house prices and excess household borrowing. Economic sustainability requires these figures to ease off. Job isn’t nearly finished.”
A week later, following an article from the Wall Street Journal which suggested the stress test was hindering first time buyers from entering the housing market Siddall replied, “seems unfair that the stress test makes home ownership harder for first time home buyers; but would be worse to risk loss of their home. After five years, first time home buyers might gain 18% on equity with a 10% home value increase, but would lose 200% with a 10% decline (95% LTV insured mortgage). Max leverage can be as high as 82:1 with negative equity after Realtor commissions.
The stance from policy makers remains historically un conventional and despite recent weakness across the majority of the nations housing markets- seem intent to maintain their recent objectives. Yes, despite home prices falling and buyers being shut out of the market these are “the intended consequences” per CMHC’s Evan Siddall. Until policy makers have a change of heart, market participants would be wise to take note.