What if the Government Didn’t Back Mortgages?

Saving for a down payment on a home takes dedication, perseverance, and sacrifice. For many, it also takes a long, long time. According to a recent report from Rate Supermarket, come 2020 the average cost of a home in Canada will be $553,000. To accumulate a measly 5 percent down payment for such a home, recent graduates should expect to spend at least 12 years saving up. If you’re hoping to pack away 10 percent, prepare to squirrel away your savings for roughly 21 years. 

Thankfully, first-time homebuyers that are unable to save up the required 20 percent downpayment can rely on government-backed mortgage insurance from the Canada Mortgage and Housing Corp. But what would happen if the CMHC was forced to scale back its mortgage guarantees? The government’s role in housing insurance has been hotly debated since the credit crunch started in 2008. Many critics feel that government-supported housing not only inflates property prices, but also puts taxpayers at the risk if large numbers of mortgage holders are forced to default on their loans.

But if reigning in the CMHC really the best answer? Here’s a quick look at what could happen if government officials were to force a cut in mortgage guarantees:

  1. House prices would plumet
    First-time homebuyers make up roughly half of the homebuying marketing in Canada. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP) it’s predicted that home purchases would drop by nearly 100,000 annually if minimum down payment requirements were to increase. This would, in turn, force home prices to drop. Eventually this would make it easier for first-time buyers to enter the market. However, the period of flux could be too much for the economy to take.
  2. Economic uncertainty
    Speaking of the economy… roughly one-fifth of Canada’s economic production can be traced directly to housing-related spending. As such, falling prices and a slow market could grind the economy to a halt (roughly one in six new jobs in Canada are construction related). Over time, this would eventually level off.
  3. Depleted retirement savings
    Most Canadians see their homes as their biggest retirement investment. Devaluation and hampered growth of this important asset could leave hundreds of thousands of seniors financially stranded.
  4. Fewer lenders to choose from
    If insured mortgages were taken off the table, fewer investors would feel comfortable providing small lenders with low-cost funding. It would simply be too difficult for smaller lenders to compete with the major banks. Less competitions would mean fewer mortgage choices for first-time buyers.
  5. Rural backlash
    Many lenders are hesitant to lend in small or rural markets as it’s harder to resell a repossessed home that’s located in the middle of nowhere. Without the safety net of an insured mortgage, more people would be forced to buy closer to urban areas.
While other countries look to Canada’s housing market as a pillar of strength, it’s far from perfect. However, dismantling government-backed insurance could result in more problems rather than solutions. Right now, mandatory 20 percent down payments are merely being discussed. Ottawa will have to do some long, hard thinking before the implement requirements that could cause extensive economic danger, even if it would result in proper risk taking and further reduce the odds of government-funded mortgage rescues.

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