“More choice. Lower prices. Better service.”
In ads and online, Ottawa has made its expectations crystal clear when it comes to the wireless market, extolling the virtues of wide-open competition as a necessary protection of consumer rights. Yet when it comes to the housing market—the biggest and most daunting purchase most of us will ever make—this commitment is suddenly lacking.
No one wants to inflate a housing bubble by encouraging folks who can’t afford the debt to buy. But many creditworthy first-time homebuyers are paying much more than they should have to for a significant portion of their housing purchase. When it comes to mortgage default insurance, Canadians get little choice and sky high prices, regardless of service. Thanks, Ottawa.
Mortgage default insurance is required by federal law for all homebuyers making a down payment of 20% or less; an average Canadian home purchased with 5% down requires more than $10,000 in mortgage insurance premiums. And more than likely this fee goes to Canada Mortgage and Housing Corp., the Crown corporation that controls the mortgage insurance business.
Since the global credit meltdown of 2008, federal Finance Minister Jim Flaherty has attempted to bolster the housing market by toughening mortgage requirements. Amortization periods have dropped from 40 to 25 years, minimum down payments have been raised, debt caps tightened and refinancing options reduced. He’s even tried to warn banks away from discounting mortgage rates. All to discourage poorer credit risks from entering the housing market.
The policy has worked. Average credit scores for CMHC’s mortgage insurance customers last year were an impressive 738, a far cry from the required minimum of 620. The chance a new borrower will default on a mortgage has dropped sharply.
Yet rates for mortgage insurance haven’t budged in almost a decade. Insurance is supposed to be based on risk—if the risk goes down, so should the premium. What gives?
Standing up for put-upon homebuyers, Ontario real estate broker Brian Bell recently launched an online campaign requesting Ottawa cut mortgage insurance premiums by 15%. “Lower risk means lower claims,” he argues. “Shouldn’t the savings be passed on to the consumer?”
Bell points out reducing insurance rates won’t overheat the housing market since it doesn’t change any of the other eligibility criteria; it would simply lower the price. A 15% cut could put $1,700 in the average homebuyer’s pocket.
Bell’s quest seems quixotic: considering all Flaherty’s previous efforts to keep a lid on the housing market, it’s unlikely he’ll give buyers a break just because they asked nicely.
Rather, the current inequity in mortgage premiums should be seen as evidence of how Ottawa has retarded competition in the mortgage insurance business by allowing itself to be the biggest player.
CMHC controls about two-thirds of the market while publicly traded Genworth Canada has around 30%; Canada Guaranty (part-owned by the Ontario Teachers’ Pension Plan) mops up the remainder. But if mortgage insurance rates are too high, shouldn’t the private sector be cutting prices to attract more customers? Isn’t that how “more choice, lower prices, better service” is supposed to work?
Not until CMHC’s dominance is broken. All three competitors (and I use the term lightly) charge identical premiums. During the last two rate reductions—in 2003 and 2005—both public and private sector moved in lockstep, producing the indistinguishable rate sheets we have today. CMHC will match whatever price its smaller rivals pick so nothing changes, a classic “Nash stalemate”—the non-competitive economic outcome named for Nobel-winning economist John Nash.
Unless Ottawa privatizes CMHC and frees the private sector from competing with a dominant Crown corporation, mortgage insurance premiums aren’t going anywhere. The mortgage insurance business, however, should get a lot more profitable.
Peter Shawn Taylor is a writer specializing in economic issues