Canada’s government-run mortgage insurer is downplaying a news report that its method of collecting house price data may be causing prices to spike.
But in a statement to the press on Thursday, the Canada Mortgage and Housing Corporation did not deny that its automated risk assessment system, known as emili, may be pushing house prices higher than they otherwise would be.
According to government documents obtained by the Globe and Mail, unidentified banks, property appraisers and mortgage insurers have raised concerns with the Office of the Superintendent of Financial Institutions that emili may be raising prices.
Emili allows prospective mortgage issuers to enter data about a particular house, and the house’s proposed price, to see whether the price falls within an acceptable range. Critics — whose identities were redacted from the documents — say that emili defines too broad a range of prices as acceptable.
“It allows people to pay too much for a property,” Rick Sieb, president of Intercity Appraisals Ltd., told the Globe.
“If the property is worth $300, and somebody comes through and the realtor has convinced him to pay $330, so he’s 10 per cent out, and they submit it through Emili or another AVM, it will just say ‘yeah, that’s fine for that area,” Mr. Sieb said. “So the lender still lends the money, the guy still buys it, and the only person hurt in the whole deal is the person who paid too much.”
But the CMHC said in a statement emailed to reporters that emili takes into account many factors beyond price to determine whether a mortgage poses an acceptable risk.
“CMHC does not use property value averages, but uses the specific characteristics of the property being assessed,” the mortgage insurer stated. “The database and models are continually updated and independently reviewed by a third party. This system is one tool used by CMHC underwriters located across the country to assess the homebuyer’s application for mortgage loan insurance.”
The corporation stressed that there are safeguards beyond emili to ensure that home buyers aren’t taking on too much debt and mortgage issuers aren’t taking on too much risk.
“Industry and CMHC studies show that the majority of Canadian homebuyers do their homework prior to making an offer to purchase a home and obtain financing. Similarly, when individual banks look at a homeowner’s mortgage application, they too assess a multitude of factors including the borrower’s source and level of income and the value of the property,” the corporation said.
Yet the CMHC did not directly address whether its system could contribute to rising house prices.
Recent housing data shows that home sales across the country — particularly in Toronto and Vancouver — have slowed sharply. But surveys show housing prices still rising across the country, even in Toronto, which experienced a 12.5 per-cent decline in sales of existing homes in August, year-over-year, and a whopping 70 per cent decline in sales of new homes in the same period.
House prices can continue to rise even as sales slow because it takes time for buyers and sellers to adjust to new realities in the housing market. But an assessment system that takes too broad a view of acceptable risk could also contribute to rising prices.
The CMHC provides insurance on mortgages where home buyers have put down less than the standard 20 per cent down payment. Its insurance policies are fully guaranteed by the fedeal government, meaning taxpayers could be on the hook if the corporation finds it difficult to cover mortgages that have gone into default.
Concerns about CMHC’s activities raising house prices have been brought up before. Montreal billionaire investor Stephen Jarislowsky has suggested in the past that Canadian house prices may be overvalued by 20 per cent in some markets because of CMHC policies designed to encourage home buying.
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