Tuesday, August 14, 2012

Who Is Insuring CMHC Mortgage Insurance?

Now that CHMC is suggesting that Canada's housing market is not in for a major correction and that it expects that housing prices will actually grow more slowly than they have recently in certain markets, I thought that it was time to take a look at CMHC, also known as "The Canadian Taxpayer" since ultimately, it is our wallets and purses that are responsible for backing CMHC because it is a Crown Corporation.

Let's open by looking at house price indices in some of the world's advanced economies between 2000 and 2007 and 2000 and 2010:

Notice that Canada is right up there with Australia, the United Kingdom, Spain and France, all of which have experienced modest to very large price readjustments in the past two years.

Here is a look at the price-to-rent ratio for four major Canadian centres from 1988 to 2010 which suggests that housing is well over-priced:

Here is a look at who is insuring Canadian mortgages at the end of 2010 according to the IMF:

Nearly 50 percent of Canada's outstanding pile of mortgages are insured by CMHC but, even more interesting is the fact that in terms of total volume of insured mortgages, CMHC is estimated to have a 70 percent market share.  At the end of the first quarter of 2012, here is the composition of CMHC's mortgage portfolio:

Notice the $569.6 billion number?  The value of mortgages that CMHC insures is actually nearly as high as the current federal net debt.

Between 2000 and 2010, the residential assets of Canadian households grew by an annual average of 7 percent.  During that same timeframe, mortgage liabilities grew by an average of 8 percent as shown on this graph:

Against this backdrop, CMHC has seen its mortgage portfolio increase more than 1200 percent during that same 2000 to 2010 timeframe.

While I'm not a huge fan of the IMF, in this case I agree with their analysis:

"Our econometric findings suggest that house prices are higher than the levels consistent with current fundamentals in a number of Canadian provinces and that a correction in house prices would have measurable effects on consumption and output through wealth effects. As discussed in the staff report, the authorities have appropriately taken macro-prudential measures to curb the growth of household debt. Given the unsettled global economic environment that could trigger adverse shocks on the Canadian economy, the authorities should remain vigilant to the developments affecting household balance sheets; further macro-prudential measures may be needed if the debt build-up continues."

CHMC is a ticking time bomb.  Effective in April 2012, it is now overseen by the Office of the Superintendent of Financial Institutions (OFSI) like Canada's banks and, given the importance of its role in the Canadian housing and mortgage market, this oversight is probably too little too late.  This is particularly important since it is likely that CMHC will come, sooner rather than later, begging hat in hand for an increase to its $600 billion insurance limit, all of which we are ultimately responsible for.  That is, unless real estate prices rocket downwards, decreasing the average size of a mortgage required to buy an average house.


  1. So how much trouble can Canadians get in? In the US, we overbuilt, we borrowed too much, we had many people who couldn't afford their mortgages even before the employment picture soured. So we ended up with lots of people with higher mortgages than the houses were worth when values tumbled.

    Does Canada potential have the same toxic mix, or have they avoided a few of these traps? Also, is your economy still growing well? Canada has a nice mix of industries, so there is good potential there. I wouldn't be shorting Canadian mortgages securities yet without knowing those aspects.

  2. "But, by maintaining the current limit, Ottawa may finally be lending a hand to the private-sector mortgage insurers - namely Genworth and Canada Guaranty - which have long complained that the government has given CMHC an unfair advantage, mostly by guaranteeing a larger proportion of its insurance. (CMHC’s insurance is 100 per cent backed by the government, while private sector mortgage insurance is backed to the tune of 90 per cent)."

    "The private sector players still have lots of room to do business before they hit the $250-billion limit that Ottawa places on them collectively. And, new legislation that’s expected to pass in the next few months will increase that limit to $300-billion."


  3. Isn't CMHC now in OSFI "custody" since the new mortgage rules announcment by M. Flaherty this spring and now in effect? In view of the new regulations and the attempt to cool down the housing market, I doubt CMHC will ask to raise the 600Bln$ ceiling. Even tho the market has cooled significantly in places like Vancouver, the party can still carry on with private lenders like Genwortk. Canada has learned NOTHING (or our rulers deliberately CHOSE this route, who knows) from the US, we'll get what's coming all right. I'm glad I sold this spring :)


    John in Mtl

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