NATION’S HOUSING MARKET PROVES RESILIENT: CMHC
Homes writer Josh Skapin sat down with Canada Mortgage and Housing Corp. president and CEO Evan Siddall and regional economist Lai Sing Louie to talk about recent activity in the housing market. Here’s an edited version of their conversation.
Q Evan, can I get your general impressions of the housing market so far in 2016. What stands out to you about what you’ve seen so far?
A Siddall: The thing that stands out is how resilient the market is. We and the Bank of Canada and people talk about the high levels of consumer debt and high pricing in some markets. Canadians pay their mortgages. We saw that through the financial crisis where our arrears rates went from about one-third of one per cent to two-thirds of one per cent, when they were much higher in the U.S. Canadians, behaviourally, they just pay their mortgages.
The market is doing what the market should do. It’s adjusting carefully. More in northern Alberta, for example, where unemployment results in people changing their posture in the housing market. But so far, the market is doing what it should.
Q Lai, can I get your assessment of what you’ve seen in Calgary so far this year? Are there segments of the market that have performed better than others?
A Louie: Generally, the market in Calgary has softened. It’s not surprising considering the economic environment that we’re in here in Alberta. There continues to be downsizing in the oil and gas industry. That has impacted housing demand in Calgary.
We’ve experienced vacancy rates rising to, around five and a half per cent or so. Also, we’ve experienced a lower level of resale, so demand for resale has also come off this year. It’s roughly down in the neighbourhood of 10 per cent, after about a 29 per cent decline last year. So we are continuing to see housing demand ease but the growth rates are starting to reduce. So this year will likely be a lower level of transactions than last year. Then hopefully sometime around 2017, there’s potential that demand could start to firm up a bit. I think in terms of some of the different market segments — because of the incomes that are required to support higher end homes, that demand is a little bit softer. In more moderately priced areas ... it’s not quite as strong as it was in the past, but it hasn’t been reduced as much as the upper-end market. We’re also seeing housing starts decline quite substantially here in Calgary. That’s the builders responding to the lower level of demand and reducing new supply to try to balance the market more.
A Siddall: I read somewhere that the effect of reduced employment in the oil sector was partly offset in 2015 by public sector job growth. So, it’s been a bit of a muted effect.
A Louie: You see that especially in the Edmonton area, there’s more government-oriented jobs there. That market is a little bit stronger than in Calgary. But we are still experiencing growth in educational services, health care and social services. That area is still growing in Alberta. The government of Alberta has purposely decided to have an expansionary fiscal policy and are borrowing money right now to stimulate the economy. The trade-off is down the road, as a province we have to pay back that debt, but the current policy now for the government is to try to stimulate the economy while it’s in a period of contraction.
A Siddall: And we keep talking about jobs because that is a core driver in the housing market. It creates demand for homes, but the circumstance that we are most concerned about in our own risk book is when people lose their jobs. If their income is reduced, then they find ways to economize and pay their mortgages and save their homes. It’s when they lose their jobs that they’re forced to sell. We track many stats but that’s the principal stat that we focus on.
Q How does CMHC respond to that concern?
A Siddall: What we and our private competitors do is we hold enough capital so that if we have to take losses as a result of that, we can continue to do business. We are over-capitalized. If you take a look at the speech I issued (now available at CMHC.ca) I talk about some of the stress-testing work that we do. We hold capital for those stress-test events, which are very difficult economic scenarios, none of which we forecast but we need to be ready for.
A Siddall was later emailed to explain what stress testing is. Here’s an edited version of his reply: Stress testing is an essential part of our risk management program, and we have made significant investments in enhancing our stress-testing processes and capabilities as we strive to become a best-in-class risk manager. In addition to helping us to set our capital thresholds, stress- testing provides an opportunity to test our operational resiliency to respond to a crisis. Are our processes, systems and people capable of handling unexpected events and or emergencies? The bottom line: it would take a very severe housing downturn and a big jump in national unemployment rates, both persisting for a number of years, to start eroding our capital in a significant manner.
Q Would we be in a stress-test event?
A Siddall: No. Not even close. A stress test that we did is oil at $35 for five years with an increase in the unemployment rate nation- ally of five percentage points. That’s a big move. And that’s sustained for the entire five years.
A Louie: We’re nowhere near that. In Calgary, we are seeing some defaults come up but they’re still low.
A Siddall: In Alberta our arrears rates, (which are) 90 days not paid, are still better than the national average. The gap is closing but really slowly. But Alberta still outperforms the nation on arrears in our mortgage loan insurance policies.
Q Just to rewind for a second, Lai, you said there’s the potential to firm up in 2017, what gives you that impression?
A Louie: We don’t forecast oil prices. We never have. There has been a lot of capital taken out of the market place. If we look at drilling activity in Alberta, it’s down another 50 per cent from last year. So after a 50 per cent reduction, we’ve experienced another 50 per cent reduction. This is happening throughout Canada and the United States ... at some point in time that starts to reduce supply. We don’t know what the lag is. There are obviously producers — Iran is picking up production — but back in January we were trading around $27 a barrel and now it’s over $30.
Some people are saying it’s bottomed. Other people are not quite that optimistic. But most forecasters are projecting that, in the longer term, prices will be a little bit higher than they are in the shorter term, so that offers some optimism in terms of Alberta being an energy-based economy.
A Siddall: Someone said to me last week the best solution for low oil prices is low oil prices. It’ll create demand and restrict supply and prices go up. It’s kind of how the market works.
There continues to be downsizing in the oil and gas industry. That has impacted housing demand in Calgary. LA I SING LOUIE