February 16, 2010
BY JULIAN BELTRAME
OTTAWA — Canada’s red hot housing market may get a little hotter following Tuesday’s announcement by the federal government that new mortgage rule changes are coming to discourage cash-light buyers and speculators.
Market analysts say Canadians who were just managing to qualify for government-insured mortgages may rush into the market before stricter rules take effect April 19.
Prospective homebuyers may also jump into the market this spring to beat coming interest rate hikes and, in Ontario and B.C., the introduction of the harmonized sales tax on July 1 that could add $1,500 to the cost of buying a home.
“The whole spring housing market is going to be on fire,” predicted Derek Holt, vice-president of economics with Scotia Capital.
The other end of the coin is that the market could slow more than expected toward the end of the year.
On Tuesday, Finance Minister Jim Flaherty acceded to months of pressure to get ahead of the curve and tighten rules to discourage marginal, cash-strapped buyers and speculators. All borrowers will need to meet stiffer criteria to take out mortgages, he said.
In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year fixed-rate mortgage even if the interest they are paying is less. The government will also limit the amount Canadians can borrow on their homes from the current 95 per cent of the value to 90 per cent.
And to discourage speculation, many real estate investors who purchase properties for rental purposes will have to come up with a 20 per cent down payment, instead of the current five.
Flaherty said he has been told anecdotally of a tendency among speculators to purchase multiple condominium units and not live in any of them, which he says drives up prices overall.
The minister insisted there is no housing bubble in Canada as yet, but added that with interest rates set to rise as early as this summer, he wants to ensure Canadians don’t take on too much debt.
A new report suggests the danger is real.
The Vanier Institute of the Family reported Tuesday that average household debts loads climbed 5.7 per cent to $96,100 in 2009. The institute estimates some 1.3 million households could be vulnerable to a dangerously high debt service load by the end of 2011.
The new income test on homebuyers will have the broadest impact, analysts say.
TD Canada Trust president Tim Hockey estimated the rule change will effect up to 10 per cent of buyers, some who will choose not to buy and some who will opt to buy a smaller home.
Already, banks use the three-year fixed mortgage rate to test whether a prospective homebuyer can afford to meet payments even if the actual interest being charged — such as in a floating mortgage — is significantly less. Now, the test will rise to the five-year rate, which is about one percentage point higher.
In practical terms, it means that on the average $337,000 home, homeowners will need to have the financial means to absorb an additional $2,500 in mortgage costs a year, the TD Bank says.
Hockey said banks welcomed Flaherty’s intervention — the second in two years — even though they are free to move on their own.
“It’s a very competitive market. We’re all trying to find a way not to lose market share,” he explained.
Several market participants were relieved that Flaherty eschewed more dramatic changes open to him, such as doubling the minimum down payment on purchases to 10 per cent or further reducing the 35-year amortization period. That would have had the impact of shutting out a significant number of Canadians from the market, and in the case of the amortization period, actually increase mortgage costs.
“We would have opposed (those changes),” said Dale Ripplinger, president of the Canadian Real Estate Association. “We were very concerned the government would overreact.”
He said such drastic measures could cause home prices and sales to crumble, with a ripple effect on the general economy.
Although home sales and prices soared in the second half of 2009, Ripplinger stressed that it was far too early to call it a bubble since prices are only now returning to pre-recession levels. Part of the reason prices have risen so steeply in the last few months is because of limited supply, he said.
Although some prospective homebuyers will not welcome the changes, TD Bank economist Craig Alexander said the impact on most homebuyers will be minimal.
“All this change does is limit the size of the mortgage you are going to be able to get; it doesn’t prevent people from buying homes, it doesn’t drive a lot of new homebuyers out of the market and it doesn’t lead to higher payments,” he explained.
“It means if you are thinking of buying a $400,000 home, you may have to buy the $350,000 one.”
But Hockey said the changes will likely have the effect of “pulling forward” homebuyers and speculators to beat the April 19 deadline.
In a news conference, Flaherty said he sought a middle ground between doing nothing and taking more drastic measures.
“On the one hand we don’t want to discourage Canadians from home ownership,” he said.
“On the other hand we do want to discourage a tendency by some to use their homes as an ATM machine, and a tendency by some to buy three and four condominiums by way of speculation. These are not the kind of steps that fulfil the goal of affordable home ownership.”
The Canadian Press