MONTREAL ― When people are desperate for something but can’t get it through official channels, they often turn to less-official ones.
And typically, there’s someone there to meet the demand. The Raps game may be sold out, but there’s a guy in the alley going, “Raps tickets! Get Raps ticket right here!”
The mortgage market works according to similar principles. In Canada, the home-lending equivalent of a scalper is known as a mortgage investment corporation, and these MICs have been doing a brisk business lately. Borrowers at MICs don’t have to pass the mortgage stress test, but they face higher borrowing costs.
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The vast majority of mortgages ― nearly 90 per cent ― are issued by federally regulated banks and provincially regulated credit unions and ― in Quebec ― caisses populaires.
MICs have so far had just one per cent of the estimated mortgage market, but according to a report released this week by Canada Mortgage and Housing Corp. (CMHC), they accounted for 7 per cent of all new home loans in the final quarter of last year.
In our desperation to own a home in this ownership society of ours, Canadians are increasingly turning to the back alley equivalent of home finance.
Besides MICs, there is also what regulators call “private lenders,” about whom we know next to nothing. Often these are just individuals lending money to other individuals. How many there are, how much they’ve lent and at what rates are all unknowns.
“Behind the scenes, there is a transfer of risk from the regulated to the less regulated segment of the market — from where there is light to where it’s dark,” CIBC economist Benjamin Tal wrote in a report issued this spring.
“What is not captured in the data is the credit score of borrowers that don’t use traditional lenders. So, to the extent that more borrowers use alternative channels … the market might be riskier than perceived.”
Risky borrowers, high rates
But regulators do track some of the activities of MICs. We know their borrowers are much more likely to go under, with a delinquency rate eight times as high as at the major banks and credit unions (around 2 per cent and 0.25 per cent, respectively).
That shouldn’t be a surprise, because, for one, people who turn to alternative lenders have likely already been turned down by a major lender, so they have a higher risk profile to begin with.
But they also face much higher mortgage rates ― between 7 and 15 per cent, according to CMHC’s report. That compares to between 3.3 per cent and 5.4 per cent at the major banks.
It may not be clear just how much of a difference that makes, so let’s illustrate this. Borrowing from a major bank at 3.3 per cent, on an average-priced home in Canada today a mortgage would cost $1,975 a month.
Borrowing from an alternative lender at 11 per cent (the mid-point of the range quoted by CMHC), that same house would cost you $3,889 a month, or roughly twice as much.
(That’s assuming 20 per cent down on a house priced at $505,000, the Canada-wide average in June.)
So there may be many more stretched households in Canada than the official numbers suggest.
Behind the scenes, there is a transfer of risk from the regulated to the less regulated segment of the market — from where there is light to where it’s dark.Benjamin Tal, CIBC
A little of the pressure on homebuyers was relieved this week, when the Bank of Canada reduced its posted mortgage rate to 5.19 per cent, from 5.34 per cent. This is the rate used in the mortgage stress test, meaning the test will be a little easier to pass.
To the extent fewer Canadians are pushed to desperate measures to buy a home, an easier stress test is good news. But if easier mortgages equate with higher house prices, as has been the case, there may be no relief there in the long run.
The recent slowdown in home sales hasn’t had much of an effect on housing affordability in Canada’s most expensive housing markets, Toronto and Vancouver, and affordability has been worsening rapidly in Montreal and Ottawa, where prices and sales continue to climb.
Canada needs more homes
Increasingly, policymakers are turning their attention to supply, and growing evidence that many parts of the country may be undersupplied with housing, particularly at the lower end of the market.
A recent report from the Canadian Centre for Policy Alternatives pointed out that construction of rental housing has collapsed to a fraction of what it was three decades ago, largely the result of governments abandoning subsidies for rental construction.
The CCPA estimates that, even with recent commitments by the federal government and some provincial governments to increase affordable housing construction, the total built won’t match what was built a generation ago, when Canada’s population was much smaller.
Keeping Canadians out of debt trouble may mean hitting the accelerator on those affordable housing efforts. And taking a little breather on Canada’s obsession with home ownership might not hurt, either.