Ottawa is ramping up oversight on federally backed housing mortgages, as Finance Minister Jim Flaherty tabled legislation in Parliament on Thursday that aims to put Canada's Mortgage and Housing Corp. under the oversight of a federal regulator.
The new legislation would also ask banks to shoulder some of the lending risk in Canada's red-hot real estate market.
Flaherty, who hinted at the change in the recent federal budget, said that CMHC has become a major player in the country's mortgage sector and requires stiffer control.
"I've been concerned about CMHC for some time, in this sense, it's become an important financial institution in Canada and it was not subject to the same supervision" as major financial institutions like banks, he said.
"I think this is an important step forward."
One major plank of the new plan will require CMHC to undergo a yearly "stress test," which would be similar to tests currently in place for banks. Those tests ensure that the institutions could make it through times of economic upheaval.
While CMHC was initially created to handle mortgages for public housing, it has become increasingly important because it backstops mortgages in Canada that have less than 20 per cent down payments.
The government backing on such high-leverage mortgages has taken some of the lending exposure off banks, and it was instrumental in keeping Canada's housing sector stable during the financial crisis of 2008-09, which saw foreclosures and collapse in many key U.S. markets.
However, the government guarantee on high-leveraged mortgages, in addition to years of low interest rates, has led to an influx of home ownership and housing starts that many analysts believe is unsustainable.
In turn, housing prices have become over-inflated, and Flaherty has voiced concern over hot condo markets in Toronto, Vancouver and even Montreal.
But the new legislation would put CMHC under the Office of the Superintendent of Financial Institutions, and it would be forced to undergo the same rigorous tests as the big banks.
Tsur Somerville, an analyst from the University of British Columbia, said that the heated housing market in cities like Toronto and Vancouver is the result of several key factors.
He said that capital inflow from investors and "people speculating on housing" has been driving up the prices of homes in a "very low" interest rate environment.
Recent statistics show that Toronto has more condo developments than big American centres like New York and Chicago.
Sonya Gulati, an economist from TD Bank, said that the changes are part of an overall message from the federal government that low interest rates are not sustainable.
She added that Toronto has a "condo glut," and there have been warnings that condominium units are 10-15 per cent overvalued on the retail side.
"There's concern about all of that supply and what it's going to mean for demand going forward," she said.
Reply With Quote
Originally Posted by emperor
