Has Flaherty Played His Last Housing Card? June 2012 Mortgage Changes

So I’m sure you all heard that Finance Minister Jim Flaherty announced another round of rule changes to Canadian mortgages in an attempt to force Canadians to control their levels of debt.

While I don’t completely agree with everything in this announcement, I will say that  the lending rules are now back to the conservative way they were before the US housing crisis- so now the government will have to work on the other side of reducing household debt that involves actually growing the economy  which will put more money into the pockets of Canadians.

Here is a summary of the changes and how I think they will impact the real estate market:

1) The maximum amortization period for an insured mortgage is being reduced from 30 years to 25 years.

This is by far the biggest impact for home owners and buyers. What it means is that monthly payments will be higher but it will save owners money spent on interest over the long-term. For the most part, it is the first time home buyer segment who will be impacted the most as this group has the least amount of money. Some estimates predict this will equate to 5% less first time home buyers in the market because they can’t afford the increase in monthly payments. In my opinion, this move could have more negative effect than positive. The trend is already pointing to a more balanced housing market so by shocking the system by removing more first time home buyers, the ripple will be felt upwards as it is the lower end of the market buying that spurs the higher end.

2) Cost Ratios will be set at 39% for GDS and 44% for TDS.

All I will say on this matter is that most lenders already use standards that are equal to this or more strict so this won’t have much of a change. Read this article for more information on Cost Ratios

3) Refinancing the maximum home owners can borrow is being reduced to 80% of the home’s value from 85%

I think this should have been done a long time ago. I personally think that people have to stop using their homes as virtual ATM machines. Generally speaking, a home buyer needs 20% down to avoid CMHC insurance premiums, so it is ludicrous to think that the rules allowed people to take out equity to the point where they would need mortgage insurance again.

4) CMHC will no longer be insuring homes over $1000,000

I find this one funny because mortgage insurance (i.e. CMHC) was designed to assist first time home buyers and people in the lower end of the spectrum. I’m sorry, but if you can’t come up with 20% down on a house over $1 million you shouldn’t be buying it- period. There is plenty of choice out there for under 1 million (even in Toronto and Vancouver). This will have the least amount of impact because the vast majority of home buyers in the million dollar category are not first time, and they are usually using the equity from a previous home to finance the new home.

Conclusion

There you have it, the mortgage rule changes explained. Will it change much? What I do hope is that as a country we can focus on other parts of the economy and actually take responsibility for rising debt which include many other factors aside from mortgages, (high interest credit cards & pay day loan companies come to mind).  The news media will have a field day with this and talks of ‘bubbles’ and ‘armageddon’ will sell papers and give good fodder for the water cooler but ultimately lending rules are just one factor of many that affects the real estate market and unless other circumstances change such as immigration, population, supply & demand, and interest rates (which aren’t going up anytime soon) ,  I see it not having that significant of an impact. Remember the last round of mortgage changes? What about HST or Toronto land Transfer tax? Did that really do anything?

Thought and comments, I would love to hear them