Okay folks, we all knew this was coming.
The following article was smack-dab on the front cover of Thursday’s Globe & Mail, and I have to ask: does anybody have a problem with the new mortgage rules? Because I don’t…
“FLAHERTY CLAMPS DOWN ON MORTGAGE RULES TO COOL OVERHEATING MARKET
By: Bill Curry & Grant Robertson
The Globe & Mail
Acknowledging his concern that Canada’s housing market is overheating, Finance Minister Jim Flaherty is clamping down with four changes to mortgage insurance rules.
At a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.
In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.
And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.
The changes will take effect on July 9, 2012.
“We want people to make sure that when they purchase the most important purchase they’ll probably ever make in their life, that they do so in a prudent way. And some calming of the market is desirable,” said Mr. Flaherty.
The minister said his department has conducted an analysis of the expected impact the changes will have on the Canadian economy, but he only provided some of that detail.
He said Ottawa expects that less than 5 per cent of new home purchasers will be affected by the changes. That means some people will choose not to buy a home.
“It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he said. “So if it has that kind of a cooling effect, that to me is a good thing.”
Though Canada’s big banks were caught off guard by the mortgage changes when word of the adjustments emerged late Wednesday, some lenders said Thursday they support the changes.
“Canadian household debt levels have reached levels that raise concern,” Tim Hockey, head of retail banking at Toronto-Dominion Bank said.
The government’s moves “take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians’ debt levels,” Mr. Hockey said.
Bank of Montreal called the changes prudent and responsible.
“The new measures will support the long-term stability of the Canadian housing market,” said Frank Techar, head of personal and commercial banking at BMO.
“Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada’s housing market experiences a soft landing.”
One of the issues driving Mr. Flaherty’s concern is the continued construction of condos in larger cities and the fact that prices continue to rise in spite of this added supply. He said this is a particular concern in Toronto, but he also mentioned Vancouver, Montreal and Quebec City.
While Mr. Flaherty would not comment directly on expectations that the Bank of Canada will keep interest rates low for some time, he did note that the U.S. Federal Reserve is not expected to raise interest rates as it tries to stimulate the U.S. economy.
That leaves changes to mortgage policy as one of the available tools for Ottawa to use in order to dissuade Canadians for taking too much advantage of ultra low rates and piling on debt that could become unaffordable at higher interest rates.
“It’s just a question of trying to moderate behaviour and I hope that Canadians will reflect before they jump into a market at the high-end,” said Mr. Flaherty.
Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.
It’s a great day!
It’s nice to see your government do something that should have been done a long time ago, that’s good for them, good for you, and will help everybody in the long run.
The most ironic part of all of this is clearly explained in the last line of the article above: “Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.”
Very true!
There was nothing to stop banks from tightening rules, but it seems that all banks follow each other, all the time, on everything.
On Thursday, for example, TD Bank announced that due to Canada’s aging population, they would be doing away with free banking services for senior citizens. And it was expected that all banks would follow shortly. How disgusting!
Earlier this year, there was a mortgage rate-war going on, as bank after bank sought to join the 2.99% fray, even as experts claimed that the business model wouldn’t work for banks as they couldn’t possibly turn profits by charging such a small fee for lending money.
I have no confidence in the private sector to operate with any sort of social responsibility and/or self-control, but to be honest, I’m a pure capitalist, so I can’t say I necessarily blame them. It’s like asking, “If you were a condo developer, wouldn’t you pull all the crap that they do, in search of greater profits?” Yeah, probably…
As for CMHC, that’s another story.
The ‘old standard’ used to be a 25-year amortization. Then for some reason, that was increased to 30 years. Then to 35, and then to a ridiculous FORTY!
A lot of people defended the changes a few years back, saying that in Europe, they have 100-year-amortization.
Europe. Right. And what’s going on there now?
I think we all knew this day was coming, ever since the 40-year amortization was done away with, and then the 35.
In the space of a decade, we went from 25, to 30, to 35, to 40, to 35, to 30, to 25. That’s a long journey to get back to where you started, but in the interim, house prices have risen, and these new changes are a preventative measure to help cool the market, and avoid catastrophe like what we’ve seen in other parts of the world.
Personally, I think the only people this is going to affect are those at the very bottom of the market who, arguably, shouldn’t be buying to begin with.
Take the case of a first-time condo-buyer who has 10% down on his $300,000 condo.
That $270,000 mortgage, at 3.19%, for a 5-year-fixed rate mortgage with a 30-year-amortization results in a monthly mortgage payment of $1,178.09 including CMHC fees.
The same mortgage with a 25-year-amortization increases the mortgage payment to $1,322.23.
If a buyer can afford $1,178.09 per month, but can’t afford $1,322.23, then that buyer is not giving her or himself enough of a buffer!
That’s really scraping together money to get into home-ownership! Maybe it’s not worth it? Maybe if $150 per month can make or break you, then you shouldn’t be in the market anyways, right?
That’s exactly the point of these changes!
It’s not so much the “cooling off” of the market that’s important to me, but rather reducing the debt-load, and potential future risk. If a condo-owner is so price-sensitive that $150 per month means life and death, then that owner could be in serious trouble down the road!
I still think that the single-most important change to mortgage rules in the past five years is the following:
Minimum 20% downpayment on second properties or non primary residences.
If not for this change, then somebody with $100,000 could go out and buy EIGHT $250,000 condos with $12,500 down on each, and take on far, far too much debt, while artificially inflating the market. Now, you’ve got to have $12,500 down on the first, $50,000 down on the second, and then you wouldn’t have enough for a third. Let alone an EIGHTH!
Time will tell how much these new mortgage rules affect the market, but I think preventative measures are a great step in the right direction.
If only Toronto City Council could learn how to be proactive. But that’s a topic for another day….
Joe Q.
at 9:07 am
Apparently 40% of all mortgages issued in Canada since 2011 have had amortizations longer than 25 years.
Minimum 20% downpayment on second properties or non primary residences
I missed this in the initial reports — that, plus the $1M cap on purchase price for CMHC insurance, are important developments.
Scott
at 8:29 am
I think what David was saying was that the minimum 20% downpayment on second properties was the most important change in the past five years… this change, from what I remember, was introduced by the federal government a while ago. (In 2010, I believe?)
Joe Q.
at 9:24 am
Good catch, I’d forgotten about that.
Punditzview
at 9:32 am
Thanks for the post, but it’s ironic that you believe that:
“The most ironic part of all of this is clearly explained in the last line of the article above: “Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.”
As a self-professed capitalist, surely you’ll agree that this is not a free market. Price is set by the government (i.e. the CMHC), not the free market — and it’s a risk free profit at that. As long as there’s even one bank that is willing to take the government’s tax payer funded risk-free money, then every borrower who wanted a 40-year mortgage could have gotten one.
I find it disingenuous when politicians try to place blame on the banks, but I’m not surprised – that’s just politics.
lui
at 9:42 am
Still it doesnt stop the oversea investors from buying a block of condos in a project,it only makes it harder for a first time buyer to get into the market……real estate is the driving force of Canada economy the last thing you need is slowing it down too quickly.
Ralph Cramdown
at 11:11 am
It’s pretty obvious that we can’t all get rich by building houses and selling them to each other — the wealth generation has to come from elsewhere, like exports or resource extraction. So to the extent that real estate and construction is a much larger fraction of our economy than elsewhere, we’ve got a problem.
Scott
at 8:30 am
Well said, Ralph.
CraigB
at 10:39 am
Now I know you’re a realtor and not a mortgage broker, but I’m curious if this has an affect on anyone who was pre-approved for a 30 year ammortization.
Floom
at 11:19 am
David,
Thanks for the example -your analysis of the effect on a $300k Condo buyer perfectly conveys what the media hasn’t been so clear on. Put another way, maybe it could be said “If you maxed out your borrowing/payment capacity and could purchase a $300k condo at 3.19% over 30 years, now you can purchase a $250k condo over 25 years” (I think that math works). That might be a little more frightening to sellers -but we’re talking the marginal buyer here. And if you’re selling, it likely means you’re buying somewhere else -so maybe you’ll save more than you “lose” on your current property. Not to mention that if you are selling the condo you bought 2 years ago to buy a house, interest rates have dropped since then -if you have the opportunity to refi, going from 3.79% to 3.19% makes up a bit for that shorter amortization period.
Final thought -if that b*****it Toronto land transfer tax didn’t soften real estate values (Where upon everyone but new home owners had to cut a cheque to the gov’t for $15,000 to buy a $500k property), will this?
Ralph Cramdown
at 11:25 am
“Personally, I think the only people this is going to affect are those at the very bottom of the market who, arguably, shouldn’t be buying to begin with.”
I can’t agree with this analysis, David. Every buyer leaves himself a margin of safety which varies from almost none to a lot. Unless every buyer who was planning on using a high ratio 30yr decides to reduce his margin of safety, these buyers are going to be bidding lower on houses.
Scott
at 8:43 am
I dunno, Ralph. Seems like every second episode of “Property Virgins” or “House Hunters” shows a couple with an extremely modest down payment disliking every house in their price range, then falling in love with a place that’s a good $20,000-$30,000 over their budget… followed by them sitting down and trying to rationalize how they can afford what they originally thought they couldn’t.
“You’re due for a promotion, honey” or “Our dual income will be higher in 5 years, all we have to do is get by until then” or “We can make sacrifices in other areas” are all common refrains in these shows, and I wince every time I hear them. And yes, I’m aware that these are “reality” shows, but I’ve heard plenty of the same line of thinking in the real world as well.
Ralph Cramdown
at 11:50 pm
Those kind of people are stretching to their borrowing limit now, and will be stretching to their limit under the new rules, but it will be lower. The more people are like that, the less we need to estimate the effects on people who DO leave themselves a cushion.
Alex
at 1:16 pm
Thanks God!
I know too many people with salaries in 40-60k range who went on a pre-construction shopping spree in last 3-4 years. Hopefully these changes will stop boys and girls with entry level jobs, from buying 2-3 condos… which they definitely can’t effort. Personally, I would make rules even more strict, 1st property – 10% down, 2nd – 30%; 3ed – 50%, 4th, 5th etc, must be an all cash deal. Can’t effort playing the game? Find yourself a different playground.
Chuck
at 4:54 pm
Buyers looking over a million will need to be very careful now. Not only do you need more than 20% down, some lenders are now working on a sliding scale, where you might need 40% down on a $1.5 million purchase.
David was speaking about his buyers in this price range, and there’s going to be a LOT of turbulence going on over a million in the lending world in the next few weeks. Should be interesting.
Cece
at 10:45 pm
This rule affects first time home buyers more than any other group. I don’t think that first time home buyers are the reason the real estate market is overheated. Most of the condos are being snapped up by investors. Will they be affected by these new rules? Not enough to change their behavior.
So we have essentially made it difficult for first time home buyers to buy their own property (causing them to continue to rent), which essentially gives investors even more incentive to buy condos.
The better move would have been to slow down the pace of foreign investment by requiring a 5% additional tax to be paid by foreign investors. It would not be enough to deter all investors, but it would cool down their crazy shopping sprees. Canada needs to protect the cost of living index for its own citizens. All these foreign investors eventually cash in and take out their money, leaving a housing bubble — and subsequent housing crash — behind them.
Ralph Cramdown
at 11:59 pm
If your investment condo isn’t returning you 5 to 7 percent on your down payment, after fees, taxes, maintenance and vacancy allowance, what kind of investor are you? The kind that’s relying on price appreciation. Who are you going to sell to, another investor (at an even lower cap rate?) or a first time buyer?
Nobody has made it any more difficult for first timers to own property, merely reduced their budgets. The buyers set the price. When a significant fraction of buyers have less money to buy with, prices in those market segments will “moderate.” And where do you think move up buyers get their down payments from? Oops.
Alex
at 3:16 am
We have much more local investors with low to mid incomes buying 2-3 condos… Foreign investors usually are buying property in Canada through their children who attend Canadian universities. They plan on keeping these properties for a long time. I doubt that they are going to cash out right away if the market would dip.
Joe Q.
at 9:28 am
They do get all the headlines, it seems that the extent of actual foreign investment (house and condo purchases by people who are not citizens or permanent residents of Canada) is actually very low — it is Canadian citizens and residents who are doing the buying (though certain minority groups seem over-represented in the buyer pool, which perhaps leads to that misconception).
Husan
at 3:32 am
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Matt
at 11:14 am
Couldn’t agree more. The reason Canadians are so indebted is because they are competing with an endless inflow of foreign capital.
Gerrit4
at 1:40 pm
“If a buyer can afford $1,178.09 per month, but can’t afford $1,322.23, then that buyer is not giving her or himself enough of a buffer!”
This doesn’t make sense. If they did have that buffer, then they won’t have the same buffer if the price goes up. If you can afford 1,500 a month, but are more comfortable at 1,200 a month, then it’s really not good for you (or the economy) if your mortgage goes up to 1,400 a month.
I’m not really sure why increasing monthly payments is going to help the economy – if people pay their monthly payments on a 35 year amortization, then that is better for the lender, and better for the buyer. A lender gets more interest over the extra 10 years, the buyer gets more value/house for the amount they pay per month.
In reality, what will probably happen is housing costs will dip. The market for a $600,000 home turns into the market for a $550,000 home, and the market dictates the price. Even though Toronto housing costs have become astronomical, I’m not sure that values going down is a good thing.
Joe Q.
at 11:26 am
It’s a good thing in the long run, but may be painful in the short-term for those who are depending on rapid real-estate appreciation to pay the bills.
Guan
at 12:37 am
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