Canada Mortgage and Housing Corporation (CMHC) dropped their provisions for claims by $19 million dollars during the third quarter citing lower expectations for bad loans. Loan loss provisions which now stand at $895 million are sufficient to withstand a catastrophic market downturn.
According to Brian Naish, CMHC’s CFO, “We have seen improvement in the economic indicators that underlie all of that, so for example, unemployment has improved and home price inflation, which obviously influences the severity of claims, has improved as well.”
Profits at the crown corporation rose by 20% this past quarter to $452 million putting it ahead of it’s regular earnings pace of $1.3 billion per year.
The decrease in loan loss provisions is further supported by a drop in arrears levels to just 0.33% from 0.35% from a year ago.
Yet another positive economic indicator is the drop in total insurance in force to $559.8 billion. CMHC is legislated to a cap of $600 billion so this drop provides some breathing room to the existing cap and signals that Canadians are borrowing less.
A primary driver for the drop in insurance in force is tighter lending rules. Specifically the rule that restricted refinancing activity to 80% of a homes worth (down from 95%) is a major contributor. CMHC reports that refinancing activity dropped 81% over the same period last year, reflecting the inability of homeowners to significantly tap into their home’s appreciation.
These statistics paint a different picture than the majority of economist who believe that the Canadian housing market is highly overvalued. Strong CMHC statistics, rising employment, and a stable interest rate forecast from the Bank of Canada all point to stability in the housing market.