Earlier this week, significant and impactful changes were made to the mortgage frontier in Canada.
Personally, I applaud the changes and call them long overdue.
And all it took for us to make changes to our mortgage industry was to watch another country’s economy implode…
I’m going to use this forum and this topic to make a bold political statement.
I’m not sure if I’ll regret this (we all know there’s nothing I regret writing…), and I think many readers might be inclined to agree with what I say, yet afraid to articulate it.
So here goes…
Earlier this week, Canadian Finance Minister Jim Flaherty announced steps to tighten record household borrowing amid concern rising debt levels could threaten the economic recovery. Canada will shorten the maximum amortization period for government-insured mortgages to 30 years from 35 years, and lower the maximum amount homeowners can borrow against the value of their homes to 85 percent from 90 percent.
Policymakers including Mr. Flaherty and Bank of Canada Governor Mark Carney have been urging households in recent months to be wary of taking on too much debt after data showed the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years.
I personally believe that in watching a neighbouring country’s economy implode over the last few years, we have decided, as a nation, to take steps to avoid the same fate.
I would like to think that any economy or any society can learn from its, or from another country’s mistakes…
Our neighbours have thrown their economy into the gutter by not only enacting legislation that allowed frivolous borrowing and lending practices over the past decade, but also by refusing to address the issues as they unraveled.
By offering teaser-rates, sub-prime loans, and essentially giving $700,000 loans to cleaning ladies to purchase third homes, our neighbours set the table for a disaster.
But not only did they refuse to address the impending disaster, they took it one step further by packaging this spoiled produce and selling it back to consumers just before it was about to rot.
The results have been well documented in scores of books over the past couple of years, and now I fear that our neighbours (though they would be the last to admit) will never get out from under the thirteen trillion dollar debt which they have created.
As I said: I’d like to think that any country can learn from its own, or neighbouring countries’ mistakes.
Our neighbours have also recently endured a “tragedy” which has shaken the foundation of their being.
However, without sounding like a monster or sounding entirely unsympathetic, I should admit that I believe they set the table for this disaster as well.
Refusing to address the fact that a deranged teenager can purchase a semi-automatic weapon along with his Doritos at the local 7-11 has resulted in this recent tragedy, and will likely result in many others.
Clinging to legislation that was enacted 234 years ago as if it still has even a loose association with today’s world is simply irresponsible and naive.
Times change, and while 1776 was a time of upheaval where the threat of war was imminent, I’m not sure I see the same world today when I look out my window. I’m not sure I understand the need for a soccer mom to possess a concealed weapons permit as is provided for by law.
Computer fraud wasn’t a crime in 1776 because it didn’t yet exist, so why can’t we take the opposite approach and assume that maybe all citizens in 2011 don’t need to carry weapons as they did back then?
Our neighbours have the loosest gun laws of any country in the civilized world, unless you consider the Democratic Republic of the Congo to be “civilized.” There is nothing democratic about the Congo, yet I wonder if it’s that much tougher to find an automatic rifle there…
Our neighbours are refusing to address a flaw in the core of their system, and just as they blamed Marilyn Manson’s music for a school shooting in 1999 instead of noting that teenagers were able to stockpile automatic weapons and tens of thousands of rounds of live ammunition without being detected, they are now refusing to even consider the possibility that their two-hundred-and-thirty-four year-old rules need a re-evaluation.
I don’t just blame the “deranged, 22-year-old monster” that took the life of a cute 9-year-old girl as well as five others, but rather I blame the three-hundred-million naive and careless residents of our neighbouring nation for creating, maintaining, and supporting a culture of ignorance that can only result in exactly what we witnessed last week.
I hope that the rest of the world takes note of both the ridiculous laws themselves as well as the refusal to correct them.
But I’d better stop myself there before I really get off topic. Back to mortgages…
Our mortgage system in Canada was flawed, and after witnessing the financial and economic plight of our neighbours over the past half-decade, we identified the issues in our mortgage industry and took steps to correct them.
Far too many Canadians are taking on far too much debt, and the products being offered to Canadian borrowers were being used for things which they were never intended.
It’s irresponsible for us to be taking out HELOC’s in order to free up money for jet skis, big-screen TV’s, and spinning-rims for our pimped-out rides.
This isn’t what the mortgage regulators intended when they created these products, and now that our debt-to-income ratio has hit 146%, it was time to do something to stop us from spiraling out of control like our neighbours.
The 40-year-amortization was done away with in 2008, and as of this March, so too will be the 35-year.
I applaud these steps and I really don’t see any downside.
The people that should never have been in the market to purchase real estate to begin with will now be removed, and we’ll hopefully never experience the level of foreclosures and bankruptcies as we’ve seen from our dear neighbours.
Perhaps less than one-percent of potential buyers will be removed from the overall buyer pool, and I don’t see this having any sort of devastating impact on our real estate market. Sorry to all those who are “waiting for the collapse”…
If you can’t afford the same property with a 30-year amortization as you could have afforded with a 35-year amortization, maybe it’s time to assess whether or not you were ready to jump in with both feet in the first place. God forbid our market did turn for the worse – you’d have negative equity in your home and you wouldn’t be able to make your payments.
And is it really a good idea to borrow up to 90% of the value of your home? This figure, now brought down to 85%, used to be as high as 95% before other changes were enacted a couple years ago! It’s insanity at its finest!
I’m proud of our Finance Minister and his think-team for enacting these rules and others!
I think it’s a fantastic rule that you must have a 20% downpayment on any second property! Otherwise we could have rampant speculation (as if we don’t already…) and people running around buying properties with 5% downpayments!
Let’s decide that we’re only going to make loans to people who can afford to pay them back!
Let’s maintain a policy of ensuring borrowers are actually qualified instead of issuing a $500,000 loan to a migrant worker who picks strawberries on the Golden Coast!
If real estate investing was so easy then everybody would be doing it. And you know what? If you make it easy enough to do – then everybody will!
The thought of somebody taking $50,000 and making five downpayments of $10,000 on five condos instead of one downpayment of $50,000 on one condo actually scares the pants off me. This isn’t “safe” by any means. I’d like to think that our Finance Minister and our country’s leaders will not only create a fiscally responsible framework within which we can work, but also strive to eliminate the potential pitfalls for those who aren’t actively on the lookout for them.
I once noted on my blog that “you can’t legislate against stupidity,” and one of my very astute readers fired back:
“Sure you can. What do you call those laws against drunk driving? That’s certainly stupid, and that’s legislation against it.”
Excellent point.
If you make it simple enough for people to be irrresponsible and completely idiotic with their money, well, some people are going to do that. We elect our leaders not to oversee us but to guide us and lead us. We assume that they will make decisions based on our collective best interests and that rules, regulations, laws and legislation that they enact are there to protect us from eachother, and from ourselves.
We watched in awe as our neighbours endured the collapse of their largest financial institutions and we could draw it all back to shoddy lending practices and utterly relaxed rules and regulations.
And we learned from this, and adapted accordingly.
As for our neighbours and their “tragedy,” well, I wish somebody in power (such as the goddam President…) would stand up and call out the elephant in the room.
Whew. This is getting heavy.
I’m in no way trying to draw a parallell between gun violence and mortgages, nor am I trying to minimize the significance of what transpired last week.
But I guess I’ve been thinking a lot lately about how leaders lead, and I’m equally as mystified by America’s archaic beliefs in the right to bear arms as I am about the financial meltdown that they created in an almost methodical, step-by-step process.
And I refuse to concede that while murder itself is illegal, the means by which it’s delivered should not be.
Jeff
at 9:17 am
I think the HELOC changes were good and I don’t mind the amortization changes – I don’t think those will have much of an effect on anything – but I do find it interesting that the powers that be say they’re worried about debt levels, so they focus on the (relatively) low-interest debt avialable only to those who qualify to buy a home, instead of the higher-interest consumer debt available to practically all Canadians (credit cards, lines of credit, car loans, etc.) I guess it’s easier to go after the former, and more profitable for the banks too.
Stan
at 9:17 am
David,
Great post…a bit of a meandering thought pattern but its your blog, you can write whatever the heck you want and I pretty much agree with all you’ve written!
I will point this out -you posted an entry once about a developer who required 10% down and how that screwed up your ROE/IRR numbers on a potential investment…you were pretty upset about that -now the gov’t is regulating that for us. BUT, I’m guessing you’ve changed your mind a little bit and recognize that its for a greater good, even if it affects condo flippers in the short term.
As for gun control -what did Bowling for Columbine reveal? Gun ownership rates in Canada were substantially similar on a per-capita basis but we have about 3% of the number of gun-related crimes here…Gun culture seems to play a huge role here as does the availability and ease of procurring a handgun -an easily concealable weapon.
The founding fathers meant that everyone has the right to display a pair of bear arms on a plaque on the wall (as was the style in those days) and had no clue it would be misinterpreted.
Marina
at 9:32 am
This reminds me of this Greek lady protester they quoted a few months back when the Greeks had to undertake austerity measures and everyone rioted.
She said “I’m rioting because they are totally RUINING MY LIFESTYLE!!”
Most people (Americans, Canadians, Greeks, you, me) have a really hard time seeing past their own wants and giving something up for the greater good. It’s unfortunate, and I too am glad that Canada is taking measures to curb some of that excess.
Oh, and I also don’t believe anyone needs to stock-pile semi-automatic weapons to “go deer hunting”.
RPG
at 11:06 am
Oh thank you thank you thank you I’m so glad somebody finally said it. I was watching CNN all last week (I’m a hopeless news junkie) and not once did they suggest tighter gun control laws. They actually tried to blame the college classmates of the gunman for “not doing more to warn authorities.” All the while I’m wondering why people need hand guns in the first place?
buk
at 11:44 am
they should of also increased the minimum downpayment from 5%. this change will come in due time. Goverment is taking baby steps due to Carney’s pressure. For you to say this will have a minor impact on the real estate market is totally wrong. What percentage of your first time buyers are going 5%/35years? I’d say it’s well over 50%. Prices will surely come down, especially for condos.
Jeff316
at 12:28 pm
I’ve always thought the 5/35 trend was exaggerated, but that’s just from anecdotal info…I have no facts/stats to back it up. Maybe David will know more.
According to RBC, 30 percent of new mortgages were 35 year amortizations.
(page 2 on http://www.rbc.com/economics/market/pdf/mtgrules.pdf)
While that’s definitely up from 8 percent last year, that’s not exactly a huge proportion. Particularly considering that the document doesn’t specify how many of those had less than 20 percent down.
But if it is going to have an effect it will be in the condo market, I agree with that buk.
Jeff316
at 12:31 pm
Sorry I was incorrect, the 8 percent is the proportion of outstanding mortgages estimated to be at 35 year ams.
David Fleming
at 1:25 pm
@ Buk
You’ve been predicting this market crash for at least 18 months now, no?
When the market does crash, I think you and I should buy a building together…
I just went through my list of deals from 2010. You’ll have to trust me on this.
I sold 22 condos to first-time buyers, and 4 houses to first-time buyers (for which I have mortgage information – some people are mysterious and keep the info to themselves…)
Of those 26 people, six put down 5% with a 35 year amortization. Amazingly, one of these was a $1,000,000 condo.
Of the remaining 20 buyers, only four put down 20% or more.
So I guess the conclusion we can draw here is that while not as many people are putting down 5%/35 as you might think, even fewer are putting down 20% or more.
Two of my 20% clients were investors (first time buying in Toronto), and the other two just wanted to have a “large downpayment.”
David Fleming
at 1:27 pm
@ Stan
Allow me to clarify.
I complained that developers were starting to require a 20% deposit as opposed to the 10%.
Consider that if you purchased a pre construction property in 2006, you would put down 10%.
That property would be ready in 2009, then you would close in 2010. In 2010, you would put down an additional 10% (via your mortage to ensure a 20% downpayment).
The issue I had was that I didn’t want to have 20% sitting in the developer’s bank account for 3-4 years; I only wanted 10%. Ultimately, I’ll put down 20% on every investment property I own because I want to avoid CMHC insurance premiums, and because I don’t believe in over-leveraging myself.
David Fleming
at 1:28 pm
@ Everybody
Sooooo……..nobody wants to talk about GUN CONTROL?
LC
at 1:53 pm
Well, actually, considering anyone can buy a gun relatively easily in the US, I’m surprised there aren’t *more* cases like this when you consider how messed up that country is at the moment.
As for mortgages, I don’t understand the point of buying a non-investment property with only 5% down. I remember a great quote I read somewhere that went something like “A house without equity is like paying rent with debt”. I myself am on a 35 year, BUT I put down 27% and am making weekly prepayments towards the principal.
Jeff316
at 2:15 pm
Interesting info, thanks for checking your deals.
Martin
at 2:52 pm
When we bought our house, we put down 35% and used a 35 year mortgage. 2 years later, we’ve prepaid down the mortgage and the term is now 24 years. We used this approach because we wanted flexibility, our income has a high variable component to it, and it works fine for us.
It’s not that the 35-yr amortization is dangerous. It’s people with incomes that barely qualify using a 5% down payment WITH a 35-yr amortization WITH floating rates that are dangerous.
Should have we been denied our mortgage? I don’t think so. But that’s when you take ALL things into consideration, which is what prudent credit adjudication is all about. Unfortunately, you cannot regulate good judgment (to put it in a positive way) so I guess this new regulation will have to do for now.
However, I don’t think that if they had not passed this regulation, the US experience would have happened in Canada. 1. Mortgages are non-recourse in the US, which is not the case in Canada. What this means is that you can’t just “give the keys” to the bank in Canada. 2. Mortgage interest is not tax deductible in Canada, but it is in the US. Therefore Canadians have an incentive to pay down their mortgage. 3. Mortgages were crappy by design to feed Wall Street’s securtization machine. This is also not the case here. Those are 3 big differences with the US that are seldom pointed out.
Wooba
at 2:59 pm
Not really. This is a website about Toronto real estate.
buk
at 3:01 pm
@David
i didn’t say a market crash, i said a market correction. i do believe prices in the GTA will come down as much as 5% this year and in fact it’s well on it’s way. are you telling me prices MoM in the gta are up in the second half of last year?
JG
at 3:33 pm
Gun control is an illusion…
more ‘control’ aka legislation – the larger the black market.
The courts are too soft to take a strong stance against crimes involving guns. They need to have a stronger deterence from committing the crime.
In high school – i could get a gun on the black market quicker than i could get a gun out of a shop. Good’ole high school days!
Marina
at 5:23 pm
There is no way of finding this out, but I’m curious how many people actually take 100% of what they were approved for. We took about 60% of what the bank was willing to fork over.
If 8% of the mortgages out there were for 35 years, I’d bet many of those were strategic decisions (and not desperation every last dollar that can be borrowed).
David, what is your experience in general? Do people tend to borrow the maximum the bank will give them?
David Fleming
at 6:02 pm
@ Marina
No, I find that if your ‘average’ buyer is thinking of purchasing a $450,000 starter home, the bank usually approve them for $600,000.
I think people are smartening up and realizing that borrowing the maximum isn’t necessarily the best move.
J.
at 8:24 pm
David – do you not think there is a problem with the market if about 85% of first time home buyers don’t even put 20% downpayment on their home?
Maybe its a strategic cash flow decision where they rather have their money at the bank then in a home, but does that not leave people to risk of having no equity if housing prices fall by 20%?
I know there won’t be a ‘real estate’ crash some have been speculating, but we have seen housing prices fall in the past, wiping out a significant amounts of equity in a home. I ‘ve seen it in the 90s after prices have doubled in the 80s.
George
at 1:19 am
Two good topics, and probably my favourite blog entry of yours.
Forget banning the sale of handguns, just ban the creation of them. I cannot think of a reason why society needs handguns, other than the circular logic that police need them to keep up with criminals.
As for mortgages and condos in Toronto, it’s not always the equity you have but the equity you will have that determines the risk. The typical condo buyer is relatively young and has years of job income ahead of them, thereby easing the concern about downpayment and repayment. On the other hand, if a 45 year old is pushing the limits of these rules, then you know there is a problem.
Jeff316
at 9:28 am
Yeah we were the same as LC, 25 down, 35 year am. We make payments at approx. a 23 year rate, but the flexibility to pay the 35-year amount did come in handy after a surprise car accident when we need three months of extra cash to find a used car real quick.
I was surprised how everyone involved with our purchase last year really pushed the 35 year amortization, for the sake of flexibility. We had never considered it until then. That’s what makes me interested to see if others had the same experience – taking the 35 not to get a foot in the door, but for future flexibility’s sake.
I also wondered how on earth the bank could qualify us for such a huge mortgage (relatively speaking) so it’s good to know that most people aren’t borrowing the max.
Havoc
at 2:10 pm
Agree with George, great post.
Handguns – The government should take Chris Rock’s advice. Tax bullets just like alcohol and tobacco. If bullets cost $10,000 each then the shooter must have a darn good reason for firing the gun. The crime rate will drop dramatically. (joke)
Mortgages – Our government is taking a similar approach. I’m against the decision to drop amortizations from 35 to 30 years. As Jeff said, It would be good to have the flexibility. They should have done the same thing they did with interest rates (you must qualify for a fixed rate even if you choose to go with variable).
The govt should have made rules that make it mandatory for buyers to qualify for a purchase price based on a 30 or 25 year amort but still give them the option to go to 35 years if they qualify. It would be better for many people’s financial planning. Who doesn’t enjoy flexibility?