Helping members cope with high prices, high interest rates and low supply
Making sense of Canada’s complex and harrowing housing market is hard enough for anyone these days; for credit unions, it can be especially complicated to understand what’s happening and how to best respond to fast-changing conditions.
“If you had asked me a year ago about the housing market, I would have said something quite different than now, and it will probably change again,” says Greg McQueen, VP/community banking at $5.7 billion Libro Credit Union in London, Ontario.
“It has been a challenging year for the real estate market in Canada. Higher interest rates have had an impact, and this has affected both credit unions and their members,” says Bryan Yu, chief economist for $12 billion Central 1 Credit Union in Vancouver.
“When we look at the impact on credit unions it becomes apparent that the challenges come in terms of both loan growth and loan volumes this year,” Yu says.
Housing is vitally important to credit unions—it’s by far the largest portion of their loan portfolios. Some of the challenges this year are common to all financial institutions and for that matter, anyone who is in the real estate market.
The Bank of Canada pushed up its key lending rate from 0.25% in March 2022 to 4.75% today. That rate may be a millstone around the necks of many borrowers. The central bank says that mortgage holders who renew their loans in the next few years will see their monthly payments rise as much as 40%.
“Most households are expected to face financial pressure in the coming years as their mortgages are renewed,” the bank said in its annual Financial System Review.
Higher rates will affect credit unions and their members just as much as they affect customers of banks and larger financial institutions, Yu says.
The impacts may feel more personal though, he adds, because “credit unions are more community-oriented and more connected to individuals’ savings and loans.”
Staying Close to Communities
That’s not necessarily a bad thing. A study by Deloitte prepared for Canada Mortgage and Housing Corp. in 2017 looked at the impact of credit unions (and mortgage finance companies) on the national housing market and found that “credit unions’ level of local market expertise is a key advantage” in the overall situation for borrowers and buyers.
Credit unions’ local knowledge “[translates] into the ability to selectively extend credit to borrowers who are perceived as ‘riskier’ … at acceptable incremental risk levels,” Deloitte’s report said.
As far back as 2016, credit unions and mortgage finance companies already held 17% of the residential mortgage market, and the Deloitte report said there was an opportunity for them to do more.
Credit unions can “adapt to the nuance of new local markets,” the report said. As long as they are prudent, they can “provide more options for borrowers, particularly those who might be considered to be on the fringe of prime by a major bank, but would fall within the risk appetite of a credit union.”
“We try to position ourselves as best-in-the-market for first-time home buyers,” McQueen says.
“What we’re looking at is, how do we help young Canadians get into home ownership? What we’ve been seeing is a lot of resignation in the minds of younger buyers, people resigning themselves to never owning a home,” he says.
“There’s frustration, helplessness, even anger and we want to get in front of that, helping individuals set realistic expectations and understand what they can afford.”
Difficult Housing Markets
In regions such as the Greater Toronto Area, the housing market can be stubbornly difficult. The Canadian Real Estate Association reported that the average sale price of a home in the GTA in April was $1.106 million, up 2.4% from the previous month and 2.5% from three months before that.
True, prices are down by 12.2% from early 2022, when interest rates were still at rock bottom. But prices are still up a shocking 36% from the early days of the pandemic in 2020.
Credit unions need to be both prudent and effective, and that makes it important for them to be both customer-focused and understand the market’s larger trends, says Mike Moffatt, assistant professor at Western University’s Ivey School of Business in London, Ontario, and senior director of policy and innovation at the Smart Prosperity Institute, a research and policy think tank.
Stable or dropping prices may only be temporary. For example, between March and April 2023, prices declined in such rural and cottage areas in Ontario as Bancroft and the Kawartha Lakes, but prices in Mississauga and Hamilton, where many first-time and step-up buyers go house hunting were up by 4.7% and 5.4%.
“In general, home prices started to decline when interest rates went up [starting in March 2022] but those declines have largely gone away. Prices are creeping up,” Moffatt says.
Challenges in Smaller Centres
It’s not only large centers such as the GTA or British Columbia’s Lower Mainland (which includes Greater Vancouver) that are seeing upward price pressure. There’s also pressure in mid-sized and secondary markets, particularly those where there are a lot of university students who need housing, Moffatt says.
“In a lot of these college and university markets, we’re seeing rents go up as much as 25% year over year. These kinds of increases filter through the entire market, as people buy up condos and single-family homes and convert them into student rentals,” he says.
College and university towns in Ontario now have “chronic housing shortages,” Moffatt told the Globe and Mail in May. “We have seen enrollment go up substantially since about 2015 … but colleges and universities have barely built any student residences in the last 10 to 15 years,” he said.
There’s also some continuing demand for homes outside the larger centers as workers push to work from home and avoid commuting to offices.
This trend slowed down after the pandemic waned, Yu says. “The movement toward smaller centers has been shifting, but some of the changes in the economy that have taken place since the pandemic started are still percolating.”
And in any case, Moffatt notes, “the inventory of housing is still pretty low and it’s still largely a seller’s market.”
Government Programs and Policies
Federal, provincial and municipal governments and the building sector are all pushing new policies that they believe would increase the housing supply. Credit unions can help by working with all levels to help shape these policies so they work effectively, Moffatt says.
“A lot of it is going to come down to government relations. With their strong community roots, credit unions have a large megaphone that they can use to talk about the need for more housing supply and more affordability,” he says.
Credit unions can also work directly with governments, particularly municipalities, to help both officials and developers navigate regulations and programs to get more housing in front of prospective buyers more quickly, McQueen says.
“Typically, the loudest voices against the types of development ideas we need are those that are already there: the ‘not in my backyard’ crowd. Credit unions can play a role in amplifying the voices of first-time home buyers and those who require more affordable housing options, and work with municipalities to find creative solutions more quickly. We can also work to build expertise and align ourselves with developers and builders who cater to first and step-up home buyers,” he says.
Moffatt, Yu and McQueen are all watching closely the housing policy changes that different governments have brought in, and how they might affect lenders. For example, in May 2023, the City of Toronto voted to legalize two-, three- and four-unit multiplex dwellings, which until now were not allowed by zoning in many parts of the city. Toronto’s City Council also signed onto a provincial plan to build 285,000 homes in the city within 10 years.
While these kinds of policy changes may boost the housing supply, they also require credit unions to reexamine their lending criteria, Yu says.
“Are these triplexes and fourplexes commercial properties or residential? There may be different lending criteria depending on whether you look at it as lending for a larger commercial development or for someone simply expanding their home to create a few more units,” he says.
There’s no single answer, Yu adds. “This is something that will likely have to be considered credit union by credit union.”
There are many other government policies in place or on the way; some of them may help ease the housing crunch but others may not, Moffatt says. An important role for credit unions is to navigate the different programs, he says. It’s hard work determining which programs work best to help communities provide more housing and also how to help members access the programs that work best for their particular situations.
The federal government offers three main programs aimed at first-time buyers. The First-Time Home Buyer Incentive offers eligible buyers 5% or 10% of the funds toward a down payment; those eligible must have annual incomes no greater than $120,000 ($150,000 in Greater Toronto and Vancouver), and the incentive must be paid back within 25 years.
Another federal program, the Home Buyers’ Plan, allows first-time buyers to withdraw up to $35,000 from their Registered Retired Savings Plans in a calendar year to apply toward a down payment on an eligible home. The withdrawal must be repaid within 15 years.
There’s also a federal home buyers tax credit, which first-time buyers can claim in the year they buy or build a home.
Reaching Out to Members
It’s almost certain that most credit union members who are first-time buyers will need help working through these programs and their mortgage options. Some credit unions offer options that are tailored to such buyers.
For example, $26.2 billion Meridian Credit Union, the largest CU in Ontario, offers high-ratio mortgages that allow buyers to put less than 20% down, as well as providing advice on how to structure a mortgage that involves funds being contributed by friends and family members. Mortgages with friends can be complicated; they involve joint ownership and liability, and Meridian CU recommends that prospective joint owners get legal advice before jumping in.
In early June, Jay-Ann Gilfoy, Meridian CU’s president/CEO, wrote an op-ed in The Globe and Mail that she supports new approaches to home ownership and new funding methods.
“My team and I at Meridian are bullish on innovations like co-ownership mortgages that allow buyers to purchase a percentage ownership in a building,” she wrote. “We support shared equity-appreciation lending that allows families on modest incomes to afford the down payment on a home and share in the equity appreciation of that home over time with a patient investor.”
As well, she called for increased use of community investment bonds that provide investors with a competitive return while supporting the construction of attainable housing.
Working with developers, provincial and local governments, and community groups to provide more housing can be even trickier for credit unions, but it’s important to try, Moffatt says.
“Certainly there’s a role for credit unions to work to help non-profit builders and developers who build co-op and social housing,” he says. The problem still comes down to supply though. In Ontario, British Columbia, and smaller centers with large student populations, there simply aren’t enough homes available to meet demand, so prices keep climbing.
Provincial governments, most notably Ontario, have moved aggressively to change the conditions to better support developers in providing more housing, overruling municipal zoning restrictions, and eliminating rules that prevented building on floodplains or protected greenspace. But many of these measures are mired in controversy, face stiff opposition, and in some cases, may be challenged in court.
Bold reform of some kind is necessary regardless, Moffatt says. Credit unions can help most at this point by understanding what reforms might work and helping members understand what the changes mean.
Explaining and Encouraging
“Explaining is definitely a role that credit unions can take. I think a lot of the programs and changes are not that well understood,” Moffatt says.
“Overall, I think the Ontario reforms are moving in the right direction —though not by opening the Greenbelt [protected greenspace]. The big challenge is the speed of things,” he adds.
“Ontario commissioned a housing affordability task force that reported its findings in February 2022. They came out with 55 recommendations, but the government has implemented only about one-third of them,” he notes.
The Ontario Housing Affordability Task Force urged the province to set a “bold goal of adding 1.5 million homes [to existing stock] within 10 years and update planning guidance to make this a priority.” While the Ontario government has accepted the idea, its planning updates don’t provide the necessary roadmap for how to achieve this, Moffatt explains.
For example, too little has been done to encourage the growth of transit-oriented communities, where housing is built close to or along public transportation lines, he says.
“Many developers are holding back, waiting to see if there are more [regulatory] reforms to come. If you’re a developer or a landowner, you might wait on the sidelines to see if the rules are more favorable two or three years from now,” he says.
The higher interest rates that are already locked in are an impediment not just for mortgage shoppers, but for builders who need funds to develop projects, Moffatt adds. “So, you’ve got a highly uncertain regulatory environment coupled with a high-interest environment,” he says.
“We’re still not seeing the growth in supply that most of our communities need,” Libro’s McQueen says.
“Families need more affordable housing options, developers and builders are in the business of doing so profitably, and municipalities are charged with building healthy and diverse communities,” he says.
A reform Moffatt says he’d like to see is to have the federal government bring back tax credits that builders used to enjoy when they developed rental properties.
“In fact, we used to do just this. Until 1972, depreciation rates were 10% on wood-frame buildings and 5% on concrete ones. These accelerated depreciation rates increased the rate of return in the early years of a purpose-built rental housing project,” he wrote recently in the Globe and Mail.
“Investors could keep these gains so long as they invested the proceeds into a building that cost as much, if not more, which … encouraged further building,” he said.
“Removing these incentives contributed to the collapse of new rental housing builds. In 1972, more than 35,000 new rental units began construction in Ontario; there weren’t that many rental housing starts in the entire 1990s. We could reinvent these tools for 2023,” Moffatt said.
Central 1 CU’s Yu says that every credit union can look at how to work with alternative models for housing, such as co-op developers and rent-to-own plans. These can be complicated for both lenders and mortgage holders, though, and the results and outcomes will vary, he warns.
There is a specialized role for credit unions in housing, nevertheless, he adds. In a constantly swirling housing market, they can help by continuing to do what they do best—staying close to the communities they serve, he says.
McQueen says it comes down to continually trying to answer a key question: “How can credit unions be the catalyst to help all the stakeholders work together?” cues icon
David Israelson is a non-practicing lawyer who writes about Canadian business topics.