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Canada has one of the highest homeownership rates in the world thanks in part to its low minimum down payment requirements, but Evan Siddall, president and CEO of Canada Mortgage and Housing Corporation (CMHC), believes those requirements may be contributing to the lack of affordable housing in some parts of the country.
“Politicians are tempted to help first-time homebuyers enter the market, but low down payments may be part of the problem adding to affordability pressures and macro-economic vulnerabilities,” he said last week during a speech at the Bank of England’s offices in London.
According to Siddall, in 1992 the Canadian government lowered the minimum down payment for first-time homebuyers from 10 per cent to 5 per cent; it then extended that benefit to all homebuyers in 1998.
Unsurprisingly, those adjustments resulted in increased demand from homebuyers who would not have been able to enter the market under the original requirements. Now, however, the changes are creating problems, particularly for the first-time homebuyers who should be benefiting from them.
Explaining the issue, Siddall said that the “extra demand” that Canada’s low minimum down payment requirements have triggered is “simply feeding higher house prices.” As a result, the first-time homebuyers that they are supposed to help are taking on greater amounts of debt — so much that household indebtedness in the country is now at an all-time high.
Siddall believes that at this point, the “objective of supporting housing affordability demands that CMHC explore a potential future path to higher minimum down payments.” He also thinks a loan-to-income limit should be explored.
While there’s no guarantee that either of those things will happen, Siddall did say that the Canadian government has already take some steps to reduce risk and improve affordability in the real estate market. For example, last year, it increased the minimum down payment from 5 per cent to 10 per cent on the portion of home prices above $500,000.
The federal government also recently announced new mortgage rules aimed at limiting risks taken by both households and lenders, as well as at reducing speculation. Sidall expects those measures to also help “moderate demand for housing in Canada’s housing markets, limiting price increases and making houses more affordable.”