As the Chairman, Chief Executive Officer and co-founder of First National Financial Corporation, Stephen Smith is considered one of Canada’s leading financial services entrepreneurs. We asked Stephen to share his thoughts on recent regulatory changes and how First National is responding to them.
Do you share the concerns expressed by public policy leaders about Canada’s housing market?
Absolutely. Here in Toronto, I think we are experiencing a housing bubble. It’s very serious. Housing is key to our identity and to our existence. Everyone has an innate desire to own a home and have a place to raise a family and to the extent that it’s unaffordable to do so, that’s a societal issue. However, it’s a challenge to think of things to do that will have the desired effect. Ontario recently imposed a foreign buyer’s tax, for example. But the demand isn’t just from foreign buyers, it’s here domestically.
So it’s a demand issue?
That’s part of it, and once you get demand like this, you see speculators coming into the market and that further enhances the situation much like you get a bubble in the stock market. In addition, we have a supply issue in Toronto. We have municipal and provincial land-use policies that have had the effect of increasing the price of housing by limiting supply. It takes a long time for builders to bring supply to the market with current restrictions and with public opposition to things like intensification. People believe in intensification, unless it’s in their neighborhood.
Did policymakers overact to the situation in Toronto and penalize other communities in the process?
Possibly and it may be necessary to think of Toronto as an international city like London, Paris or Tokyo where people really don’t think about owning a single-family home. If you buy in those cities, you buy an apartment or a large condo. That sort of thinking is not the norm here and maybe that will need to change.
What about rent control measures imposed by the Province of Ontario?
I think rent controls are a mistake because they do nothing to improve housing stock supply. But we knew they were coming because of stories in the media about landlords raising rents 100 percent. When politicians see stories like that, it’s very difficult for them to resist taking action.
Changes were also made by the federal Department of Finance last fall aimed at cooling the market. What do you think of those changes?
We believe the government has a role to play in ensuring the housing market is stable but some of these changes are having the effect of reducing competition and favouring Canada’s biggest banks. We don’t think a reduction in competition is good for consumers. Remember that the big banks have already been designated D-SIBs or Domestic Systemically Important Banks and they operate in an oligopoly, meaning there is little counterbalance in the market in the form of competitive alternatives. Firms like First National provide that choice and it’s a choice that should not be eroded by government.
Your competitiveness definitely increased with the introduction of NHA-MBS.
That’s right. When those conduits were created back in 1987, it permitted pension funds, mutual funds, life insurance companies and institutions other than the big banks to invest in mortgages. Some of the changes introduced last fall have reversed 30 years of history in attempt to reduce the government’s exposure to housing market risk and that’s not good for public policy. The government has a significant exposure to risk through CDIC deposit insurance but they don’t seem concerned about that in the same way. It’s a bit of a mystery to me that they seem so focused on one risk and not on the other.
Do you speak to these issues when meeting with policymakers?
I try to speak for all Canadians by saying there is an advantage to competition and that there should be a competitive dynamic. There should be choice for consumers, simple as that.
Is there anything similar in history to what you are seeing now with housing price escalation?
Yes, it’s reminiscent of 1988-89. It’s been 30 years since we experienced a bubble but that market basically burst overnight as consumer psychology changed.
How does First National protect itself against a housing bubble bursting?
First, we insure most of our product or sell it to institutions so we don’t bear the direct risk of significant changes in the market. We’ve also mitigated risk through tighter underwriting standards that have been in place for five or six years now. The quality of mortgages First National originates now is as good as it’s been since Moray and I started the business. Another important risk mitigator in our business is that we typically don’t lend in the heart of Toronto and Vancouver where price escalation has been significant and individual mortgage values can be in the million-dollar range. In fact, the average value of single family mortgages underwritten in 2016 is just under $300,000 dollars. First National mortgages are in the suburban areas surrounding the large Canadian cities and are less likely to be affected by a real estate slump.
Even so, do you believe First National will have to pivot as a result of these recent regulatory changes?
Pivot is not the right word; adjust is probably the better way to describe it and I think we will adjust well, although there are challenges and these will become more evident in the second quarter of 2017. Single family originations will likely be lower for the remainder of this year compared to last year and with that, competition for business in a shrinking market will become more intense. We’re also a big issuer of CMB and NHA MBS and we get most of our margin through those channels. We’re restricted through a cap on how much CMB and how much NHA MBS we can do and we’re going to use our full allocations this year as we did last year. For that reason, we should be able to maintain our margins.
What else is important from a strategy perspective right now?
Good service. First National has an advantage over other institutions because all we do is provide mortgages. It’s bred in our bones. Because of our specialization, we can be faster problem-solvers for our customers and reach faster credit decisions. In this current environment, really in any market, better customer service wins the day and that’s what we aim to do.
What about changes to the business model?
No need. What we have in place here is effective, it has been proven to be effective through multiple business cycles and I believe it will continue to work as we move through this new phase of the cycle.
As we look ahead, I have no doubt that First National will remain Canada’s largest non-bank originator and underwriter of mortgages during and after this period of market adjustment. Our business plan for 2017 is to manage the challenges before us in single family, focus on realizing the value of mortgage renewals in our pipeline and endeavor to grow our commercial business. While we pursue these objectives, we know that with close to $100 billion of mortgages under administration, we can count on a strong foundation for ongoing income and cash flow.