Larger Down Payment Amounts Should be Studied: CMHC

Federal regulators should consider increasing the minimum down payment on homes to reduce economic risks, according to the head of the Canada Mortgage and Housing Corporation (CMHC).

“I think the objective of supporting housing affordability demands that CMHC explore a potential future path to higher minimum down payments,” Evan Siddall, CMHC president and CEO, said in a speech in London on Friday.

He noted that the level of household indebtedness in Canada has reached an all-time high and now sits at 168% of income. Also, Canadians have a higher concentration of their net worth in real estate assets, which could threaten to compound the effects of a housing price correction.

“High levels of indebtedness coupled with elevated house prices are commonly followed by economic contractions,” Siddall explained. “The conditions that we now observe in Canada concern us. Increased household borrowing could be jeopardizing our economic future.”

The federal government has already taken steps to address this issue. Last month, it announced all buyers with an insured mortgage would have to undergo a stress test to make sure they could still make payments if interest rates rise. And in February, new mortgage rules came into effect earlier this year, which requires buyers to put down 10% on the portion of the home price above $500,000.

But he noted that some provincial governments are considering support for first-time homebuyers. Just last week, Ontario announced it plans to double the maximum land transfer tax refund for eligible first-time homebuyers to $4,000. As of Jan. 1, 2017, eligible homebuyers won’t have to pay land transfer tax on the first $368,000 of the cost of their first home.

While the CMHC’s mission is to help Canadians meet their housing needs, Siddall said they don’t need access to 19:1 leverage to purchase a home.

“In fact, he said, it may be a fool’s bargain with the extra demand simply feeding higher house prices: The benefits of the policy accruing to wealthier home sellers rather than to the young first-time homebuyers it purports to help.”