Last week’s federal budget showed the Harper government is still carefully watching the housing market as it reduces the risk it’s willing to have taxpayers bear.
In the budget, it was noted that “the government continues to implement measures to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.”
The actual tweaks to existing operations were minimal and reflect the above budget statement.
Through one of its Crown corporations, Canada Mortgage and Housing Corp. (CMHC), the government insures residential mortgages, which allows for more affordable housing to Canadians. The amount of bulk (portfolio of mortgages) insurance that CMHC can sell in the upcoming fiscal year was cut from $11 billion to $9 billion.
The government also reduced the amount of residential mortgages that can be securitized into National Housing Act mortgage-backed securities (NHA MBS), which are the building blocks for Canada Mortgage Bonds (CMB).
NHA MBS are bond-like securities backed by pools of residential mortgages with a guaranteed timely payment of interest and principal from CMHC. The CMHC guarantee makes NHA MBS marketable to sophisticated institutional investors.
CMB are securities that go one step further. They remove the risk that principal can be returned at inopportune times (prepayment risk), and thus they behave like plain vanilla bonds.
Under the new budget, CMHC will be able to guarantee up to $80 billion of NHA MBS (down $5 billion from last year) and up to $40 billion of CMB (down $10 billion from last year).
These two tweaks continue to reduce the taxpayer’s risk to the housing market by further limiting the government’s exposure.
Commentary in the budget reflects the government’s view that the evolution of the housing market is on the right path.
“Recent developments suggest that actions taken to ensure the long-term stability of the Canadian housing market have been effective,” the budget states in the chapter on Canada’s recent economic performance.
“The most recent increase in housing activity and prices has not been accompanied by an acceleration in residential mortgage credit growth. This suggests that homebuyers are purchasing homes with larger down payments and that existing homeowners are taking advantage of low interest rates to pay off their mortgages at a faster rate.”
End of Immigrant Investor Program
What could have bigger ramifications for Canada’s housing market—Vancouver, in particular—is the end of the curious Immigrant Investor Program.
This is a program that has not been a success for the Harper administration. The program used to provide a pathway to citizenship in exchange for a guaranteed loan that was much less than what some of Canada’s peers required.
The budget states, “It has significantly undervalued Canadian permanent residence. There is also little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country.”
According to the South China Morning Post, an estimated 45,500 mainland Chinese millionaires will have their immigration applications cancelled and their fees returned. These millionaires were prepared to lend the Canadian government $800,000 interest-free for five years.
The South China Morning Post calls the program “the world’s most popular wealth migration program.” The publication reports the program brought in 185,000 migrants to Canada since the 1989 Tiananmen crackdown and facilitated an exodus of rich Hongkongers.
However, a huge backlog of applications to the scheme had built up, such that applications were frozen in 2012. Now the federal government will clear this backlog by eliminating the program altogether.
While new applications haven’t been accepted since 2012, it remains to be seen how the Vancouver housing market cools off and the weight this carries in national housing statistics.
But it would seem that the government has killed two birds with one stone:it both eliminated a backlog of immigration files that were not promising, and attempted to make Vancouver housing more affordable for Canadians.