L'ÎLE-DES-SŒURS, QC, July 15, 2015 /CNW Telbec/ - The Québec Federation of Real Estate Boards (QFREB) is reacting to the most recent comments by the C.D. Howe Institute on the impact of a possible real estate crash on public finances and the Canadian economy. In a commentary published on July 9, the Institute states that, hypothetically, if property prices were to fall by 30 per cent in five years, the Canadian government would be on the hook for an amount of $3 to $9 billion in order to cover a portion of the losses suffered by mortgage insurers who do not have a sufficient financial cushion. Ultimately, it would be Canadian taxpayers who foot the bill.
Real estate market crash: an unlikely scenario
The QFREB believes that it is unlikely that Canada will experience house-price declines similar to those that recently took place in the United States, and this sentiment was indeed mentioned by the two Institute researchers who conducted the study. It seems even more unlikely in Québec.
The QFREB stresses the fact that the most recent real estate debacle in the United States, which began in late 2006, was rooted in the lax practices of mortgage lenders, who were also practicing in a flawed regulatory environment. In Canada, not only have mortgage practices always been more conservative and better regulated, but mortgage insurance rules have been tightened several times since 2008, thereby further strengthening our mortgage insurance system which is guaranteed by the federal government.
In real estate, risk also depends on location
The QFREB welcomes the idea proposed by the C.D. Howe Institute to modulate the amount of mortgage insurance premiums according to the risk level of the various markets, including geographically. "The situation of Canada's residential real estate market is very different from one province to another and from one city to another," said Paul Cardinal, Manager of the QFREB's Market Analysis Department. "For example, while some observers are concerned about soaring housing prices in the Vancouver and Toronto real estate markets, the Montréal market has been experiencing a soft landing for two years now, and price growth has not even surpassed inflation," he added.
A generalized increase in mortgage insurance premiums would be detrimental to accessibility
The QFREB does not agree with the idea that the general level of mortgage insurance premiums should be increased in Canada. It was just increased on June 1, 2015. Additional increases would have a negative impact on home ownership and would not be justified. The C.D. Howe Institute advanced this idea by stating that, although the reserves held by mortgage insurers (Canada Mortgage and Housing Corporation (CMHC), Genworth Canada and Canada Guaranty) exceed the standards established for this purpose, they would be insufficient in the event of a 30 per cent drop in residential property prices over 5 years. If such an event were to occur, the authors of the study estimate a financial loss of $17 billion for mortgage insurers and a lack of funds in the amount of $3 to $9 billion, which will need to be assumed by the Canadian government. The increase in premiums would therefore be used to build an emergency fund that is large enough to prevent such a scenario.
However, the QFREB would like to emphasize that the mortgage insurance business in Canada has been sufficiently profitable so that the principal insurer, the CMHC, a Crown corporation, has paid dividends of $18 billion to the federal government from 2004 to 2013. These dividends came from the surplus that was achieved mainly through mortgage loan insurance activities, and thus from premiums paid by people who bought a property in the last decade.
"If the federal government needed to advance between $3 and $9 billion to bail out mortgage insurers' potential losses, it would be misleading to say that all Canadian taxpayers would be paying the bill, as recent home buyers have already contributed to paying a much higher amount to the federal government," added Mr. Cardinal.
About the Québec Federation of Real Estate Boards
The Québec Federation of Real Estate Boards is a non-profit organization composed of Québec's 12 real estate boards and the close to 13,000 real estate brokers who are their members. Its mission is to promote and protect the interests of Québec's real estate industry so that the boards and their members can successfully meet their business objectives.
SOURCE Fédération des chambres immobilières du Québec
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