CMHC might not like this housing recovery: BMO chief economist

Financial Post August 6, 2013 - OTTAWA — The housing market may be recovering just a little too fast for CMHC, the federal Crown corporation that has a key role in shaping the market. Doug Porter, chief economist with Bank of Montreal, wonders if housing statistics over the last couple of months showing sales and prices rebounding might have spooked the CMHC.

“I think this step is being taken because we have seen some signs in recent weeks that the market is not cooling as much as had been expected,” said Mr. Porter, on the still rising market. “All the debate has been whether we will have a soft or hard landing and I would question whether the market had any landing whatsoever.”

Canada Mortgage and Housing Corp. is limiting guarantees it offers banks and other lenders on mortgage-backed securities.

CMHC has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350-million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.

The federal Crown corporation was given authority to guarantee up to $85-billion this year under the program — of which about $66-billion was committed by the end of July and approaching the total of $76-billion in all of 2012.

“As a result of this unexpected increase in issuance volumes to date and to better manage volumes going forward, CMHC will be introducing a formal allocation process in late August,” the agency said in an Aug. 1 note to lenders.

Last week, both realtors in both Vancouver and Toronto released results showing a strengthening market in Canada’s two most expensive cities for housing.

Toronto July sales were up 16% from a year ago with average prices rising 8% during the same period. Vancouver sales were up about 40% from a year ago and were 0.1% above the 10-year average.

CMHC’s move may increase mortgage rates charged by Canada’s largest banks by between 15 and 45 basis points, National Bank Financial Inc. analyst Peter Routledge said in an Aug. 5 research note. A basis point is 0.01 percentage point. Smaller competitors that don’t see their funding costs increase to the same degree may benefit, he said.

The conversion of loans into securities with CMHC backing is a way for lenders to tap funds from a broad range of investors and enables banks to issue more mortgages and at a lower cost.

But Finance Minister Jim Flaherty has expressed concern that the housing market might overheat and infect the economy and has taken a number of steps in recent years to stem the flow of mortgage credit.

Last summer, Mr. Flaherty introduced tighter rules for mortgage lenders and borrowers — a change that the real estate and lending industries say was the main reason for a slowdown in residential property sales that began last August and continued through the first part of 2013.

This spring, Mr. Flaherty also went as far as to publicly chastise some banks for dropping their mortgage rates too low.

Housing-market data are showing few signs of a hard landing even amid the warnings. Home sales in Toronto and Vancouver, Canada’s two largest real estate markets soared in July, the cities’ real-estate boards reported last week.

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