Long Term Outlook Ahead of Short Term Profitability

A sharply worded letter released last week by Canada’s national housing agency (CMHC) has drawn much praise from those looking out for consumers’ interest and much criticism from many mortgage lenders and others who profit from questionable lending practices.

Evan Siddall, CMHC CEO, released a somewhat scathing letter that chastised a long list of prominent mortgage lenders for helping heavily indebted borrowers buy new and more expensive homes which he argued could harm Canada’s economic growth. His request for lenders to “put our country’s long-term outlook ahead of short-term profitability” arrived without warning and put many lenders on the defense.

On Friday, Canada Deposit Insurance Corp CEO Peter Routledge expressed backing for the CMHC letter stating they too are seriously concerned by lender’s behaviours.

CMHC announced in early June that it would tighten its standards to qualify for mortgage insurance on July 1. These tighter qualification standards have not necessarily had their intended effect (to keep over-extended Canadians from spending more than they an afford) but instead seen a bigger shift to “private insurers” who are only interested in their bottom lines.

At the same time that this letter was released last week, the Bank of Canada made a second reduction to their benchmark mortgage rate now set at 4.79 per cent. This rate is used for mortgage approval stress tests and lowering it has the exact opposite effect and consequences of what the CMHC is trying to avoid.

So, what does all of this mean for you? Is Canada’s housing market nearing a breaking point? So far, the housing market seems to have brushed off COVID concerns and continues to defy all logic or rational. Even CMHC’s warning that our housing market may drop by 18 per cent this fall doesn’t seem to dissuade people.

While nobody knows for sure, alarm bells are (or should be) ringing loud and clear. What happens when the government benefits wind down and unemployment numbers tick higher? Will you find yourself over-extended and unable to manage your debt load?

The right way to approach any lending situation is through the eyes of a sound financial plan that tells you what you can really afford to spend, and not simply spending whatever amount you can get approved for. Following this path will give you confidence to live within your means, regardless of what lenders tell you to spend.

Only time will tell when and how big our next housing correction will be, but that doesn’t mean you shouldn’t be prepared for it today.