The Friday Rant: When Will It End?


6 minute read

March 15, 2013

The real estate bears will have a field day with this one.

Yet another attempt to prop up the real estate market: mortgage brokers trying to make it easier for first-time buyers to purchase…

“Brokers Pursue Mortgage Break For First-Time Buyers”
By: Tara Perkins
The Globe & Mail
Tuesday, March 12th, 2013

Mortgage brokers are pressing the federal government to make it easier for young people to buy their first homes, just as the spring sales season descends and Ottawa prepares its next budget.

Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals, recently met with finance department officials in a bid to convince them that their efforts to cool the housing market have gone too far, especially when it comes to the impact on first-time buyers.

“March, April and May are the most important months for both new sales and re-sales,” said Mr. Murphy. “And the market is slowing.”

The government has deliberately taken measures to cool the growth of house prices and mortgage debt levels four times since the financial crisis, amid fears that it was heating up too quickly.

The most recent measures, which took effect in July, included chopping the maximum length of insured mortgages to 25 years from 30. All other things being equal, a shorter mortgage means higher monthly payments for the borrower.

Mr. Murphy and a number of other industry players say this rule change, coupled with stiffer lending guidelines that regulators have imposed on the banks, have made it too difficult for young people to enter the housing market at a time when prices remain high. While sales have dropped significantly in the wake of the July rule changes, prices have yet to follow suit.

Now Mr. Murphy is asking the government to resume its backing for insurance on 30-year mortgages, as long as the buyer can prove they could qualify for a 25-year mortgage. He is also pushing for an increase to the $750 tax break that first-time buyers receive.

The Finance Department declined to comment, but it is unlikely that Ottawa will take any such steps right now. Finance Minister Jim Flaherty signaled this year that he was pleased with the impact his changes have had so far, and wouldn’t mind seeing house prices come down.

And he took Bank of Montreal to task last week for its decision to cut the advertised price of its five-year fixed-rate mortgages from 3.09 per cent to 2.99 per cent (lower rates are available in the market, but that was the lowest posted five-year fixed rate among the largest banks), indicating that he continues to be worried about consumers racking up too much mortgage debt and inflating house prices.

Indeed, he went so far Friday as to pat other banks on the back for not following suit by dropping their posted five-year rates to such levels (customers can negotiate with banks and obtain discounts from the posted or advertised rates).

Some economists, such as Canadian Imperial Bank of Commerce’s Benjamin Tal, are cautioning that the housing market could rebound more quickly and to a greater degree than expected this spring after months of slumping sales. And the point at which consumer debt levels are likely to become a real issue for the economy is when interest rates finally begin to rise.

Phil Soper, the chief executive of real estate agency Royal LePage, supported Mr. Flaherty’s three earlier interventions in the market, agreeing it had become overheated, but thought the changes in July went too far and made it unnecessarily difficult for first-time buyers.

However, he suggested that, eight months on, the damage has been done, and so he is not pressing Mr. Flaherty to create new incentives for first-time buyers right now. The government might as well save those for when interest rates rise, he suggested.

“There is not an overwhelming cause from a public policy standpoint to provide further assistance to young people who want to own their own homes,” Mr. Soper said. “I think that might come, and we might be talking about that in a couple of years as it becomes more difficult for them.”


And in a related story, banks in the United States are pressuring government to allow them to package sub-prime mortgages together, get the ratings agencies to stamp them A+, and sell them to investors…


No, not really.  But I think I’ve made my point.

When will it end?

When will we learn from our mistakes?

There are an equal amount of market bulls and bears out there right now, and the bears are much more vocal (as you can tell from their frequent posts on this blog).  But suggestions like the one in the Globe article – that we make it easier to enter the real estate market, just gives bears more reasons to say, “Watch, and wait.”

I’m neither a bull, nor a bear.  I work in today’s market, not tomorrow’s, and certainly not yesterday.

I don’t expect a crash, nor do I believe prices will continue to add 5-8% per year on average, in perpetuity.

But I do understand that affordability has become an issue, as house prices have risen at two or three times the rate of household incomes over the past two decades, and at some point, house prices need to stop gaining so that we can all stop and catch our breath.

The Canadian and United States’ governments are keeping interest rates artificially low, with the Bank of Canada announcing last week that they would leave the overnight benchmark rate at 1% for the 30th consecutive month.  This further demonstrates that the economy is exceptionally fragile at the moment, and to be completely honest, that the red-hot real estate market is getting a little help.

My first mortgage was a 5-year, fixed-rate at 4.99%.  When I got my first mortgage at 4.99%, my father told me, “Rates will never be this low again.  You should lock in to that 5.99%, 10-year term.”  Who knew…

Rates right now are 2.99%, and one of my clients was able to snag a 2.79% rate this week without sacrificing the perks (ie. he can make up to 15% pre-payments each year).

But let’s say that I did have a 5.99%, five-year, fixed-rate, as many borrowers experienced later in 2007-2008.  How would the math differ?

A starter-condo in Toronto these days is about $350,000.  With a 20% down payment, at 2.79% on a 25-year amortization, the unit carries for $1,110.09.  The same unit at 5.99% carries for $1,534.11 per month.

So is affordability inflated by ultra-low interest rates?

Yes, it is.  I don’t think there’s any denying that.

And yet the article above references mortgage brokers who suggest that it’s too difficult for first-time buyers to buy!

Huh?  Where’s that logic?

How could it possibly be easier?  Milk & Cookies at all showings?  Hand-holding until the day of closing?  Nap time during negotiations?

If rates went up to 5.99% overnight, just for the sake of argument, how many condo-owners wouldn’t be able to make their monthly payments?  To go from $1,100 to $1,500 is doable, but it means today’s youngsters need to stop going out to night clubs and getting bottle service, cool their $200 cell phone bills, take fewer trips down south, buy fewer Prada purses and $300 leather belts, and you know what?  I don’t think today’s 20-somethings are capable of that.

We live in a generation of excess and consumption, and how many of those first-time buyers feel entitled to their yearly trip down to Cancun or Dominican?  Tough life…

Personally, I applaud Jim Flaherty, CMHC, and the Bank of Canada for all that they have done in the past few years to rein in some of the easy debt.

Lenders and mortgage brokers would love to bring back the 40-year amortization, wouldn’t they?  They’d love to do away with mandatory minimum 20% down payments for investment properties, would they not?

But all of this had only served to prop up the market, and make it easier for people to take on debt, purchase properties they shouldn’t be purchasing, and in turn, drive up real estate prices.

Imagine if you could still purchase a 2nd, 3rd, 4th, and 5th property with only 5% down?  How many people would own six properties, just because they’re cash flow positive?  What if interest rates doubled, and suddenly it was costing money out of the “investor’s” pocket to carry those properties each month?

Let’s face it: there are people in the real estate market who probably shouldn’t be there.  Some 22-year-old, with $15,000 in savings, should probably not be searching high and low for ways to get into “home ownership” just because money is cheap.

Mortgage brokers want to make it easier for this kid to get into the market, and don’t kid yourself – their request to increase the 25-year amortization to 30-year amortizations would only represent the beginning.

When will we learn?

People like Jim Flaherty & Mark Carney aren’t trying to stop house prices from growing and reign in debt because they are “market bears.”  They’re doing it because it’s their job, in essence, to ensure the financial health of this country, and its citizens.

I don’t put any stake into real estate predictions and prognostications from the media, since every single one of them has been wrong for the past ten years.

But both Mr. Flaherty and Mr. Carney are right about one thing: there’s too much debt out there, and it’s too easy for consumers to get their hands on it.

And Mr. Flaherty and Mr. Carney are working ’round the clock to protect people from the single-greatest danger that exists in the open market today: themselves


Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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  1. BillyO

    at 8:29 am

    But didn’t F start this whole mess by allowing for 40 year CMHC backed mortgages?

    In other words isn’t he just fixing the problem that he started?

    I agree with what you are saying in that we can’t keep having 5-8% appreciation y/y and that if there will be a correction, it’ll be due to increased rates. Speaking of which, I know it’s been said before (your dad included) but surely rates can’t get any lower than this. 10 year @ 3.7 seems intriguing, no?

  2. Jeremy

    at 8:51 am

    At this point if you can’t afford to buy at the rates then YOU CAN”T AFFORD TO BUY! We waited a year longer then we wanted to, and bought smaller than we could have. We probably could have bought a year ago, but not with the level of comfort/resilience I wanted to have with payments, and not be able to afford the travel that I still want to be able to do.

    It’s not sustainable to keep trying to get buyers “into the market” earlier than they are ready.

  3. Joe Q.

    at 9:43 am

    David writes: “… the article above references mortgage brokers who suggest that it’s too difficult for first-time buyers to buy! Huh? Where’s that logic?”

    Your first mistake was looking for logic!

    I think most people, including mortgage brokers, recognize intellectually that mortgage credit is a strong driver of house prices (probably the most important driver**), and that the reason first-timers are having trouble affording houses is because prices have been inflated by years of low rates and relatively easy credit.

    However, because it’s in the mortgage brokers’ financial interest to offer more loans to more people, they’ll turn a blind eye. The old saying about how hard it is to get someone to acknowledge something, when his livelihood depends upon his ignoring it, etc.

    I also share BillyO’s sentiments about Flaherty. I wouldn’t call him a hero for his moves to limit CMHC insurance; at best, he is undoing his past mistakes.

    (** If you do a plot of Toronto house prices over the last 30-odd years, many of the points-of-inflection line up nicely with the timing of CMHC rule changes.)

  4. DD

    at 10:09 am

    Yes, house prices have risen more quickly than household incomes on average. But the real question should be whose household income. Income does not rise uniformly across all income levels. So comparing the rise in average household income to the rise in the average house price is a useless comparison. Many of the people buying property in Toronto, particularly houses, are doctors, lawyers, engineers, accountants and other professionals whose incomes generally rise more quickly than people with lower incomes. These people are unlikely to have difficulty paying their mortgages when rates rise.

    btw, I’m just barely out of my twenties and purchased my first home when rates were tumbling. You know what I did with that opportunity. I took a 40 year mortgage for the security of knowing that if I lost my job for some reason, I wouldn’t have as much difficulty staying afloat and I paid down my mortgage like a mad person. So basically, I’ve been paying my mortgage with the goal of paying it off in 15 years or less. Sure, I’ve bought a few expensive purses and went on some trips too but all I’m trying to say is your generalization of 20-somethings not being responsible with their finances is ridiculous. Many are very responsible even though on the surface it may seem to some that they aren’t.

    But I agree, some should not be in or trying to get into the real estate market. Particularly, if they are financially irresponsible.

    The financial health of the economy is not really dependent on whether the maximum amortization is 25 years or 40 years. It is lack of education on how much debt people can handle that may cause problems. And banks/brokers and their sales people are not going to educate people properly even though it would be in their best interest to do so because they are very short-sighted.

    1. AsianSensation

      at 11:28 am

      Kudos to you Double-D.

      If JF wants to really cool the market, up the rates a bit. Don’t make new rules!

      1. Joe Q.

        at 1:39 pm

        Flaherty isn’t making new rules, he’s just revising the ones he made in 2006. Besides, this is all about the CMHC, and what types of bank loans the government is willing to insure — something that falls under Flaherty’s purview. BoC interest rates are out of Flaherty’s control.

    2. dave

      at 1:22 pm

      DD, your assessment of the statistical meaning of “average” is correct in theory, but your conclusions in the context of housing are incorrect.

      Canada has 70% home ownership, and clearly those are not all “doctors,lawyers,engineers, accountants and other professionals whose incomes generally rise more quickly than people with lower incomes”.

      Consider this.

      With 70% home ownership, one could reasonably hypothesize that home ownership is drawn from the top 80% income earners. It should be self evident that income growth on average (ie for the full 100% of society) will be a good approximation of income growth for the top 80%. Especially since the bottom quintile only earn approx 2% of society’s income.

      For those who like the facts, look at page 75 of the following Stats Can report which shows that % income growth for the bottom quintile (ie bottom 20%) for 1996 to 2005 was actually higher than for any other quintile (!).

      In the alternate, the following Stats Cat report shows income increases from 1976 to 2010, and shows increase for the bottom 20%, mid 60%, and top 20% of 16%, 9% and 26% respectively (note that the increase for mid 60% and top 20% translates to an average increase of 16% for the top 20%, the exact same increase as for the bottom 20%, and the exact same as the average increase)

      Summary. The poor (presumably non-homeowners) have actually had virtually identical % income growth as the top 80% (presumably mostly home-owners).

    3. Joe Q.

      at 1:35 pm

      “So comparing the rise in average household income to the rise in the average house price is a useless comparison.”

      You may find the following graphs interesting — they shows how the ratio of average home price to average disposable (after-tax) income has changed over the last 25 years for all the major cities in Ontario. Toronto is the first listed.

      What is most notable to me is that the Toronto price-to-income ratio was stable for about 10 years from 1992-2002, after which house prices started increasing much more rapidly than incomes.

      “The financial health of the economy is not really dependent on whether the maximum amortization is 25 years or 40 years.”

      True, but on average 40-year mortgages lead to greater debt-to-income ratios. It sounds like you are paying of your mortgage very aggressively, but most people do not. The most recent stat I read (from a CAAMP survey, ironically) was that only 30% of mortgage holders made any additional payments to their mortgage (this was in 2011, if I recall correctly)

    4. AndrewB

      at 12:10 am

      I agree with you.

      I’m 24, debt free (paid my OSAP loans pronto) and work as a Registered Nurse. My partner and I are looking for our first home. Not all 20 somethings spend frivolously. I actually rarely spend money on unneeded things. Perhaps I’m the minority though.

      1. David Fleming

        at 9:29 pm

        @ AndrewB

        You’re right – you are in the minority, but keep that mentality and you’ll surge ahead of the pack.

  5. Pot Kettle

    at 1:47 pm

    Let’s not forget that the federal government backstopped CMHC mortgages held by the banks in 08/09 to the tune of $80bil +, which allowed the banks to reload and fire off mortgages to people who probably shouldn’t be levering their family balance sheet to begin with.

    Any moron who believes that ‘our’ banks are any better deserved to get a foreclosure notice.

    And would someone put a sock in Flaherty’s mouth…everytime he opens his mouth…

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