Home Equity Loan CanadaEquity Loan Canada
Canada Hypothekenmarkt: It's not just about insurances!
As Mark Carney soon becomes mayor of a much more mighty Bank of England, all eyes turn to Canada. However, all most of us know about the land is that MI is an important part of their mortgages business. Therefore, here we take a detailed look at the Canadian residential financing markets and ask what lesson can be learned for the UK.
It' s really difficult to make comparisons between different domestic house financing schemes, and we are certainly not trying to claim that the Canada system or parts of it are by nature better or inferior to the British one. "There are indications that Canada's mandatory consumer-paid mortgages scheme has contributed to protecting the country's creditors from the full negative effects of the overall financial crisis.
However, of key importance is the active part that the government has been playing for several centuries in assisting financial institutions and the provision of government guarantee. Firstly, mortgages are available in various forms, have an informal nature and will not, at least in the near future, be a cure-all for the UK population.
Secondly, we should be prepared to consider what kind of structure could help to enhance UK macroeconomic stabilisation through the business cycle and what roles the UK governments and creditors could play in the development of more resilient construction financing schemes. Lastly, we should keep a close watch on how well the Canadians are succeeding in cooling what looks like an overheated residential property supply, as this may have an impact on how the UK Treasury under Mark Carney decides to impose macro-prudential policies on UK mortgages here.
There are several important differences between the Canadian home financing system and the United Kingdom: Madagascar has a large government mortgaging company, Canada Equity and Housing Corporation or CMHC, which initiates and implements most residential policies. Large creditors who offer high loan-to-value (LTV) mortgages - defines as over 80% LTV since 2007 and over 75% before - must mitigate their risks by securing such credit against non-payment, either through the CMHC or a retail homeowner.
Together, they allow the Canadians to directly affect the conduct of the residential and mortgages markets to an extent that is not the case in the United Kingdom. It is doubtful, even if we wanted to, whether we can quickly duplicate items from the Canadians. Like in the USA, some of Canada's institutions and causes date back to the depressions of the 1960s.
Since its introduction in the mid-1950s, one of the objectives of MI (Mortgage Insurance) has been to enable homeowners to own a broader range of homes. In every respect, MI is mandatory for higher LTV transactions - currently more than 80% definition - which reflects government and state rules for creditors, which account for the lion's share making up mortgages.
Note that Canada runs a fairly strict MI release, even in comparison to other jurisdiction that have MI market developments: the German federation offers a disastrous warranty to support CMHC or residential homeowners. MI in Canada allows home buyers to easily lend at higher levels of LTV and interest rate similar to traditional loans (i.e. those that do not require MI).
However, these borrower pays this in the shape of a one-time advance payment, which in most cases is added to the amount of the loan and amortized over the term of the loan. A structured MI premium pattern exists, mainly on the LTV of the related mortgages, to counter the higher exposure to higher LTVs.
Canada's "gold-plated" MI policy means that companies can substantially reduce exposure to counterparty risks and enjoy significant savings with the added backstop of the government guarantees behind mortgages insurance companies (see Annex B of the recent Basel consultation paper MI). What is important is that this structure seems to have helped make Canada's creditors react less dramatically to the worldwide disturbance of the financial market than we have seen, for example, from their British colleagues.
While the UK has seen a drastic decline in willingness to take risks - marked by the almost complete loss of over 90% of LTV loans, a huge leap in deposits required and the cut in home buying by half - there is no similarity in Canada.
There is no routine LTV break-down available for Canada, but a recent poll by the CAAMP (Canadian Association of Accredited Mortgages Professionals) in Maritz shows that 55% of home purchasers have had LTV rates of 80% or higher since 2010. However, they are in line with the idea that Canada's propensity to borrow from higher level TVs has been increasing and decreasing over the businesscycle.
A brief overview of the situation in Canada itself indicates that the public authorities' support roles in supporting its securitisation activity were also an integral part of the mixture. Whilst private customer deposit has long been the main provider of mortgages, as in the UK, the importance of asset backed securities has increased.
A major distinction from the United Kingdom, however, is that activities in Canada are characterised by two separate government debt issuance schemes. CMHC initiated the use of mortgages backed bonds (MBS) in 1986 when it initiated its National Housing Act Mortgages Backed Bonds (NHA MBS) program. In addition to NHA MBS, the government has also provided an effective and high liquidity Canada Pfandbrief Facility (CMB).
Liquidity streams associated with the mortgages held in the repositories are reclassified into sovereign bond-like liquidity streams that make periodic interest rate repayments and repay the nominal amount at a specified due date. Because of the CMHC's early pay bond, the lack of advance pay exposure and the nature of the collateral security, CMMBs are low-risk for all credits in the group.
NHA MBS issues increased sharply during the recent 2008-10 fiscal turmoil, particularly as the government introduced a short-term financing option, the secured mortgages purchasing programme. Pfandbriefe have also become an ever more important financing resource for Canada's creditors, as in the United Kingdom, with trends very similar to those in the United Kingdom.
For many years, the pro-active stance of the Canadians towards Securitisation activity over many years stands in contrast to a more mixed (and sometimes contradictory) stance in the UK and Europe. While we do not provide a comprehensive comparative analysis of domestic financing schemes, it seems clear that Canada's government securitization programs have made a positive contribution to an effective, highly competetive and robust residential mortgage financing system.
It is understandable that comments on the historic problems in the UK residential property sector are drawn to "grass is greener" thinking. Nevertheless, the evidentiary evidence does not immediately corroborate the notion that the Canada scheme is necessarily better than our own. Canada, L'Observateur du logement au Canada 2012, Statistique Canada et CLG. The recent developments in residential property developments in the two Member States have differed markedly (see Chart 2), which reflects a variety of internal determinants.
After a long phase of stabilization, Canada's residential property prices have been on a sharp uptrend since the mid-1990s - at least until recently - so that British interest in recent years has again fallen behind those in Canada. Part of this discrepancy is likely to be due to the softer and sharper downturn in Canada.
There is no doubt that Canada has survived the 2008-2009 worldwide economic downturn better than most developing nations, Britain included, and has grown relatively strongly, partly as a result of resilient raw material sourcing. Like elsewhere, the government in Canada has chosen to implement significant fiscal loosening and other economic recovery programs, a number of which have focused specifically on residential or residential mortgages as well.
At this point, Canada had already seen a decade-long property bubble spurred by sharp demographic trends, increasing labour and property prices and falling interest levels (similar to the UK). For Canada, a loosening of MI regulations has increased household borrowing capacity and contributed to sustaining the property bubble and loan expansion (see Chart Three), albeit with less cruelty than before.
Canada's mortgages have remained relatively strong in recent years and home price inflation continues to be stronger than earnings inflation. Now Canada has one of the most costly residential property market in the word, according to The Economist. Chart 4 shows that the relationship between domestic indebtedness and available earnings is now at the level of recent years in the UK and the US.
Due to favorable labor markets and the broad access to loans on favorable rates, there is currently little indication of physical distress. In Canada, the mortgage backlog ratio - measured as more than three month's unpaid mortgage payment - has been just over 0.3% on average for more than a decade and has not exceeded 0.5% over this time.
Nevertheless, policymakers in Canada and others are increasingly worried about the susceptibility of budgets to negative shock, in particular higher interest rates. However, the impact of the economic downturn on the economy is likely to be more pronounced in the coming months. Whilst there has been a perceptible return to fixed-rate product, one third of Canada's budget deficit remains floating interest. Bank of Canada has identified the most important internal threat to Canada's fiscal sustainability as a result of high levels of private sector borrowing and excessive valuation in some real estate markets sectors.
Mortgages account for around 70% of Canada's overall budget indebtedness. It is noteworthy, however, that Canada has also seen greater use of Home Equity Line of Credit (HELOCs), which are not included in its mortgages information. Recently, the Canadian Association of Accredited Military Professionals (CAAMP) assessed that there were 2.
About 5% of budget debts are accounted for by heelocs. Speaking recently to the Treasury Special Commission, Mark Carney pointed to Canada's increased budget indebtedness and stressed that since 2008 the German administration has taken a number of measures to gradually strengthen MI suitability regulations and policies for mortgages.
Recent Reuters research showed that Canada would see a cool ing-off residential property markets, with a turnaround in home pricing, selling and construction numbers over the next few years. The latest available evidence suggests a significant deceleration. As is well known, it is hard to make comparisons between different domestic residential construction financing schemes. The United Kingdom and Canada have both seen a prolonged boom in residential and mortgages loans, largely driven by broader underlying data.
The recent experiences are different and we do not yet know how the real estate booming in Canada will end. However, one distinguishing feature is the more active involvement of the Canada government over several years. Canada's diverse regulatory environment since the recent loan crisis has provided the government with a broader range of political leverage that depends on the need to stimulate the residential property markets to boost the overall economic recovery.
Greater emphasis on support to the financials sector is a major political distinction between the two nations, which seems to have contributed to protecting the Canadian residential property sector from some of the turmoil resulting from the impact of the worldwide loan crisis. Whilst the mandatory MI for higher LTV loans has protected Canada's banks from unfavourable commercial terms, it has neither hindered a significant real estate bubble nor a physical increase in households' indebtedness.
Clearly, MI is not a political cure-all in this respect, as today there are similar weaknesses in British and British budgets. Canada's government has agreed to take direct and repeated action to alleviate domestic behavior. But at this point it is still too early to assess whether Canada can realize a smooth landings for its residential property markets.
Regardless of the result, there may be some useful lesson for macroprudential regulatory authorities in the UK and elsewhere about the scope for fine-tuning trends in the residential property markets.