Canadian Housing Indicators Q3 2016

Date of Release: December 20, 2016

Canadian Structured Finance

© 2016 DBRS Limited

Table of Contents • Highlights • Residential Mortgage Credit and Funding • Residential Mortgage Credit • Average Home Prices in Canada • Home Sales Growth • Residential Mortgage Growth • CMHC Securitization Programs — NHA-MBS • NHA-MBS Outstanding • CMHC Securitization Programs — CMB • Mortgage Defaults • Mortgage Defaults: Canada versus United States • Unemployment versus Mortgage Defaults • Property Value Sensitivity • Net Worth and Home Equity • Home Equity and Property Value Shock • Housing Affordability • Mortgage Debt Servicing • Interest Rate Shock • Discounted Mortgage Rate 2

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Highlights • •

•

•

•

Residential mortgage credit continues to grow at a steady pace in the current extended low interest rate environment, expanding by 6.1% to $1.42 trillion as of September 30, 2016. Housing prices have continued to increase since 1988, with the average resale home price reaching $496,351, up by 7.5% year over year as of November 2016. Higher resale home pric eshave primarily been led by the Greater Toronto Area (GTA) (22.5%). The Greater Vancouver Area (GVA) (-3.0%) has been experiencing declines since August 2016, when the new foreign buyers tax was introduced. Excluding British Columbia and Ontario, the national average resale home price increased by 1.2%. Several macro-prudential policies have been implemented this year, addressing high real estate prices and taxpayer exposure to the housing market.  The British Columbia government introduced legislation effective August 3, 2016, that added a 15% property transfer tax for foreign buyers in the Metro Vancouver real estate market.  On February 10, 2016, the federal government published official regulations that restrict the funding of insured mortgages through private securitization vehicles. The rules came into effect on July 1, 2016.  The federal government announced multiple changes aimed at promoting a competitive and stable housing market:  Effective October 17, 2016 a stress test is required to be used for all new insured mortgages.  Effective November 30, 2016 new rules restrict insurance on certain types of mortgages. The amortization period must be 25 years or less, purchase price must be less than $1 million, buyer must have a credit score of at least 600 and the property must be owner-occupied.  Financial gains from selling a primary resident is still tax free; however, the sale must be reported to the CRA. While the Canadian dollar experienced rapid depreciation against the U.S. dollar in the second half of 2015, it remained relatively stable during the third quarter. Sales volume in the GVA saw an acceleration of decline in August after the implementation of the 15% property transfer tax on foreign buyers; however, this has since slowed down. The GTA remains the hottest market in Canada now, even affecting rising sales volume and prices in some cities of Southern Ontario. 3 Mortgages in arrears remain low at 28 basis points.

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Residential Mortgage Credit

•

Residential Mortgage Credit $1,600 $1,400

Over the same period, housing prices also up in tandem by 201%. Home equity lines of credit per Office of the Superintendent of Financial Institutions (OSFI): $213 billion as of September 2016.

250 200

$1,200 $1,000

150

$800 100

$600 $400

50

$200 $0

0 1999 Q1 1999 Q4 2000 Q2 2000 Q4 2001 Q3 2002 Q1 2002 Q3 2003 Q2 2003 Q4 2004 Q2 2005 Q1 2005 Q3 2006 Q1 2006 Q4 2007 Q2 2007 Q4 2008 Q3 2009 Q1 2009 Q3 2010 Q2 2010 Q4 2011 Q2 2012 Q1 2012 Q3 2013 Q1 2013 Q4 2014 Q2 2014 Q4 2015 Q3 2016 Q1

•

Mortgages outstanding grew 6.1% year over year to $1.42 trillion as of September 2016, up 250% from 1999.

Billions

•

Residential Mortgage Credit (L)

Housing Price Index (2005=100)(R)

4

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Average Home Prices in Canada •

Housing prices have continued to increase since 1988, with the average resale home price reaching $496,351, up by 7.5% year over year as of November 2016. Higher resale home prices have primarily been led by the GTA (22.5%). The GVA (-3.0%) has been experiencing declines since August 2016, when the new foreign buyers tax was introduced.

•

Excluding the GVA and the GTA, the national average resale home price increased by 7.3%.

•

Excluding British Columbia and Ontario, the national average resale home price increased by 1.2%.

•

During the same period, Alberta saw a slight price rise of 2.5%. Average Home Price (Seasonally Adjusted) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0

National Source: CREA.

BC - Greater Vancouver Area

ON - Greater Toronto Area

AB - Calgary 5

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Home Sales Growth

•

•

Sales volume in the GVA has slowed down drastically in the recent months as a result of the 15% property transfer tax on foreign buyers.

Unit Sales Annual Growth vs. CAD/USD 60.0%

1.45 1.40

40.0%

1.35

20.0%

1.30 1.25 1.20

Nov-16

Sep-16

Jul-16

May-16

Mar-16

Jan-16

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

-20.0%

May-14

0.0% Mar-14

The rapid depreciation of the Canadian dollar against the U.S. dollar in the second half of 2015 appears to have been a significant driver in the spike in the number of homes sold during that period in the GVA and GTA markets. The number of units sold peaked in January– February with a 40% annual increase in GVA and a 15% increase in GTA.

Jan-14

•

1.15 1.10

-40.0%

1.05

-60.0%

1.00 GVA

GTA

CAD/USD

Source: CREA, Bank of Canada, DBRS.

Some of that demand appears to be moving to the GTA.

6

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Residential Mortgage Growth Several macro-prudential policies have been implemented this year, addressing high real estate prices, housing affordability and taxpayer exposure to the housing market. Residential Mortgage Credit Growth, Home Price Growth and GDP Growth 17.5%

Changes to insured mortgage criteria

15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% -2.5%

2000 Q1 2000 Q3 2000 Q4 2001 Q1 2001 Q3 2001 Q4 2002 Q1 2002 Q3 2002 Q4 2003 Q1 2003 Q3 2003 Q4 2004 Q1 2004 Q3 2004 Q4 2005 Q1 2005 Q3 2005 Q4 2006 Q1 2006 Q3 2006 Q4 2007 Q1 2007 Q3 2007 Q4 2008 Q1 2008 Q3 2008 Q4 2009 Q1 2009 Q3 2009 Q4 2010 Q1 2010 Q3 2010 Q4 2011 Q1 2011 Q3 2011 Q4 2012 Q1 2012 Q3 2012 Q4 2013 Q1 2013 Q3 2013 Q4 2014 Q1 2014 Q3 2014 Q4 2015 Q1 2015 Q3 2015 Q4 2016 Q1 2016 Q3

•

-5.0% -7.5%

Mortgage Annual Growth Rate

GDP Annual Growth Rate

Home Price Growth Rate

Source: DBRS, Bank of Canada, Teranet and Statistics Canada.

7

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Residential Mortgage Growth • Macro prudential policies by the federal and provincial governments to address concerns over housing affordability and stability, targeting the hot real estate markets of GVA and GTA: •

Raised the minimum down payment from 5% to 10% on homes over $500,000 (February 15, 2016).

•

15% property tax transfer in Vancouver for foreign buyers (August 3, 2016).

•

Closing loophole to ensure the capital gains exemption on the sale of a principal residence is only available to Canadian residents (October 2, 2016).

•

Stress test for all insured mortgages (October 17, 2016).

•

Mortgages insured by lenders through portfolio insurance must meet the same eligibility criteria as for high loan-to-value insured mortgages (November 30, 2016).

•

The government is considering whether to require mortgage lenders to assume a portion of losses on default loans.

•

The Ontario provincial government increased the land transfer tax rebate for first-time home buyers to $4,000. (January 1, 2017)

• Prohibition of funding of insured mortgages through private vehicle securitizations after the transition period (i.e., ABCP) (July 1, 2016). • New standard approach for the regulatory capital requirements for mortgage insurance risk (January 1, 2017).

8

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Residential Mortgage Funding •

Loan origination by chartered banks, mortgage loan companies and credit unions remained stable at approximately 89%. Residential Mortgage Funding in Canada (as of September 30, 2016)

Special Purpose Corporations (securitizations), 1% NHA MBS, 4%

Non-Depository Credit Intermediaries and Other Institutions, 4%

Chartered Banks, 74%

Pension Funds, 1% Life Insurance Companies, 1% Credit Unions and Caisses populaires, 13% Trust and Mortgage Loan Companies, 2% Source: DBRS and Bank of Canada.

9

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CMHC Securitization Programs – NHA-MBS

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•

NHA-MBS issuance continues to be a significant source of funding for mortgages in Canada.

NHA-MBS Outstanding (as of September 30, 2016) $500 $450

Accumulated issuance since inception: $1.67 trillion as of November 30, 2016. For 2016, the Minister of Finance authorized CMHC to provide up to $105 billion for new guarantees of market NHA-MBS, up from $80 billion in 2015, to accommodate the use of NHA-MBS in CMB series.

$400 $350 Billions

•

$300 $250 $200 $150 $100 $50 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: DBRS and CMHC.

10

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NHA-MBS Outstanding • Outstanding: $452.8 billion as of November 30, 2016.

NHA-MBS Outstanding $500

40%

$450

• NHA-MBS represents one-third of total Canadian mortgage credit.

35%

$400

30%

$350

25%

Billions

$300 $250

20%

$200

15%

$150

10%

$100

5%

$50

0%

NHA-MBS Outstanding (L)

Sep-16

May-16

Jan-16

Sep-15

May-15

Jan-15

Sep-14

May-14

Jan-14

Sep-13

May-13

Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

Sep-10

May-10

Jan-10

Sep-09

Jan-09

May-09

Sep-08

Jan-08

May-08

Sep-07

Jan-07

May-07

$0

NHA % of Mortgage Credit

Source: DBRS, Bank of Canada and CMHC.

11

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CMHC Securitization Programs – CMB

$450

80%

Total CMB outstanding stands at $218.6 billion.

$400

Approximately 50% of all NHA-MBS issued were used as collateral for CMB issuance.

$300

$350

60% 50%

$250 40%

$200

30%

$150

20%

$100

CMB (L)

NHA-MBS not in CMB (L)

2016 Q2

2016 Q1

2015 Q3

2015 Q2

2015 Q1

2014 Q3

2014 Q2

2014 Q1

2013 Q3

2013 Q2

2013 Q1

2012 Q3

2012 Q2

2012 Q1

2011 Q3

2011 Q2

2011 Q1

2010 Q3

2010 Q2

2010 Q1

2009 Q3

2009 Q2

0% 2009 Q1

$0 2008 Q3

10%

2008 Q2

$50 2008 Q1

For 2016, the Minister of Finance authorized CMHC to maintain the annual guarantee limit at the 2015 level of up to $40 billion.

70%

2007 Q3

•

90%

2007 Q2

•

$500

2007 Q1

•

CMHC Securitization Programs

As of September 30, 2016, there have been 74 series of CMBs issued since inception (2001).

Billions

•

% NHA-MBS in CMB (R)

Source: Bank of Canada, CMHC and DBRS.

12

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Mortgage Defaults – Canada versus U.S. • Canadian mortgage defaults remain low.

Mortgage Defaults 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50%

DLQ 90+ CA Prime

Mar-16

Mar-15

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-99

0.00% Mar-98

• Prime U.S. mortgage defaults continue to decline and approach the long-term average.

DLQ 90+ USA Prime

Source: Canadian Bankers Association and Mortgage Bankers Association.

13

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Unemployment versus Mortgage Defaults

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The financial crisis of 2009 caused an uptick in unemployment, which preceded an increase in mortgage defaults. Employment continued to improve, with mortgage defaults following a similar downward trend. Recent increase in unemployment in the provinces most affected by the downturn in energy prices has created differences in regional performance. While the percentage of mortgages in arrears in Ontario and British Columbia has decreased to 0.13% and 0.24% from 0.15% and 0.30%, respectively, a year ago; the percentage of mortgages in arrears in the Atlantic Provinces, Saskatchewan and Alberta has increased to 0.64%, 0.62% and 0.43% from 0.60%, 0.45% and 0.27%, respectively, during the same period.

Unemployment vs. Mortgage Defaults 14%

0.70%

12%

0.60%

10%

0.50%

8%

0.40%

6%

0.30%

4%

0.20%

2%

0.10%

0%

0.00%

1990 Q1 1990 Q3 1991 Q1 1991 Q4 1992 Q2 1992 Q4 1993 Q3 1994 Q1 1994 Q3 1995 Q2 1995 Q4 1996 Q2 1997 Q1 1997 Q3 1998 Q1 1998 Q4 1999 Q2 1999 Q4 2000 Q3 2001 Q1 2001 Q3 2002 Q2 2002 Q4 2003 Q2 2004 Q1 2004 Q3 2005 Q1 2005 Q4 2006 Q2 2006 Q4 2007 Q3 2008 Q1 2008 Q3 2009 Q2 2009 Q4 2010 Q2 2011 Q1 2011 Q3 2012 Q1 2012 Q4 2013 Q2 2013 Q4 2014 Q3 2015 Q1 2015 Q3 2016 Q2

•

High correlation between unemployment and mortgage defaults.

Source: DBRS, CREA and CBA.

Unemployment Rate (LHS)

Defaults (RHS)

Mortgage Defaults 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%

1990 Q1 1990 Q3 1991 Q1 1991 Q4 1992 Q2 1992 Q4 1993 Q3 1994 Q1 1994 Q3 1995 Q2 1995 Q4 1996 Q2 1997 Q1 1997 Q3 1998 Q1 1998 Q4 1999 Q2 1999 Q4 2000 Q3 2001 Q1 2001 Q3 2002 Q2 2002 Q4 2003 Q2 2004 Q1 2004 Q3 2005 Q1 2005 Q4 2006 Q2 2006 Q4 2007 Q3 2008 Q1 2008 Q3 2009 Q2 2009 Q4 2010 Q2 2011 Q1 2011 Q3 2012 Q1 2012 Q4 2013 Q2 2013 Q4 2014 Q3 2015 Q1 2015 Q3 2016 Q2

•

CA Source: DBRS and CBA.

ON

AB

BC

14

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Net Worth and Home Equity

•

As of September 30, 2016, the average Canadian household had an estimated net worth of $726,000, including $263,000 in home equity. Net worth as a percentage of disposable income reached a record high of 843% in the same quarter.

Net Worth and Home Equity $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2

•

Source: DBRS and Statistics Canada.

Net Worth per Household

Home Equity Component

15

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Home Equity and Property Value Shock

•

•

The real estate equity ratio remained high at 74.0%, reflecting steady property appreciation. Consistently above U.S. equity ratios by 6% to 15% before the U.S. housing market crash started in 2007. Assuming 20% and 40% market value declines in properties, Canadian equity ratios would decrease to 67.5% and 56.7%, respectively.

Real Estate Equity & Sensitivity to Market Value Decline 80%

74.0% 67.5%

70% 60%

57.8% 56.7%

50% 40% 30% 20% 10% 0%

1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2

•

Canada Actual

U.S. Actual

Canada 20% MVD

Canada 40% MVD

Source: DBRS, Federal Reserve Board and Statistics Canada.

16

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Mortgage Debt Servicing

7.0%

6.1%

6.0% 5.0% 4.0%

3.1%

3.0% 2.0% 1.0%

Mortgage Debt Service Ratio

2016 Q1

2015 Q1

2014 Q1

2013 Q1

2012 Q1

2011 Q1

2010 Q1

2009 Q1

2008 Q1

2007 Q1

2006 Q1

2005 Q1

2004 Q1

2003 Q1

2002 Q1

2001 Q1

2000 Q1

1999 Q1

1998 Q1

1997 Q1

1996 Q1

1995 Q1

1994 Q1

0.0% 1993 Q1

Increasing amounts of mortgage payments applied to amortization of principal.

8.0%

1992 Q1

•

In contrast, the amount of disposable income allocated toward interest payments have continuously decreased, standing at a low of 3.1% in Q3 2016.

Mortgage Debt Service Ratio

1991 Q1

•

Despite increasing debt levels, the amount of household disposable income allocated to service mortgages have remained stable since 2008, standing at 6.1% in Q3 2016.

1990 Q1

•

Mortgage Debt Service Ratio, interest only

Source: Statistics Canada.

17

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Interest Rate Shock Sensitivity

•

Since posted mortgage rates are typically discounted, the estimated GDSR for an average 25-year insured mortgage assuming current average home prices, estimated average family income and actual borrowing costs remained above the 39% cap in Q3 2016.

•

If home prices continue to go up, fewer and fewer families will be able to qualify for an insured mortgage.

•

According to CMHC, homebuyers with CMHC-insured mortgages have an average GDSR of 23.7% as of September 30, 2016.

50.35% 49.53%

50% 45%

43.57%

40% 35% 30% 25%

Conventional Mortgages

Insured Mortgages

Conventional Mortgage + 2% Interest Rate Increase

Insured Mortgages + 2% Interest Rate Increase

Source: DBRS, Bank of Canada, Statistics Canada and CREA

2016 Q2

2015 Q3

2014 Q4

2014 Q1

2013 Q2

2012 Q3

2011 Q4

2011 Q1

2010 Q2

2009 Q3

2008 Q4

2008 Q1

2007 Q2

2006 Q3

2005 Q4

2005 Q1

2004 Q2

2003 Q3

2002 Q4

2002 Q1

2001 Q2

2000 Q3

1999 Q4

1999 Q1

1998 Q2

1997 Q3

1996 Q4

1996 Q1

1995 Q2

1994 Q3

20%

1993 Q4

On July 9, 2012, the Canadian Federal government tightened the rules surrounding debt serviceability by implementing a cap of GDSR at 39% of a household’s monthly income.

57.58% 55%

1993 Q1

•

Insured mortgages: GDSR increases to 58% of income from 50%.

60%

1992 Q2

•

Conventional mortgages: GDSR increases to 50% of income from 44%.

1991 Q3

•

Housing Affordability with 2% Interest Rate Increase 65%

1990 Q4

Home affordability sensitivity to a 2% increase in the average five-year posted mortgage rate is as follows:

1990 Q1

•

18

Thank You Jamie Feehely Managing Director Canadian Structured Finance DBRS Limited +1 416 597 7312 [email protected]

Ernest Chan Financial Analyst Canadian Structured Credit DBRS Limited +1 416 597 7377 [email protected]

Clara Vargas Senior Vice President, Surveillance Canadian Structured Finance DBRS Limited +1 416 597 7473 [email protected] 19