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…

Really?

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…