Ottawa tightens mortgage rules to avoid 'bubble'

[albertGQ]

Surprised I haven't seen this thread yet

The Finance Department said yesterday it will stop backing mortgages with amortization periods longer than 35 years as of Oct. 15.
It will also start demanding a down payment equal to at least 5 per cent of the home's value, rather than guaranteeing mortgages where they buyer has borrowed the total amount.

http://www.theglobeandmail.com/servl...ry/?query=CMHC

[BlackArcher101]

Well crap, that just delays my purchase even more now. I might as well just spend all the money I have saved

[Bring_Back_Shantz]

These are probably good moves.
I really think there aren't many things more rediculous than signing up for a 40 year 100% mortgage.

[Cowboy89]

Originally Posted by Bring_Back_Shantz

These are probably good moves.
I really think there aren't many things more rediculous than signing up for a 40 year 100% mortgage.

It can be a risk reward thing. Ie if you bought with those terms and the house price appreciated significantly, you'd be much better off than had you been renting. The government is trading some economic upside for stabily here. It's a little late though as there already exists a bubble fueled by buyers who bought their houses on a zero down, 40 year basis, especially in Calgary.

[Bring_Back_Shantz]

Originally Posted by Cowboy89

It can be a risk reward thing. Ie if you bought with those terms and the house price appreciated significantly, you'd be much better off than had you been renting. The government is trading some economic upside for stabily here. It's a little late though as there already exists a bubble fueled by buyers who bought their houses on a zero down, 40 year basis, especially in Calgary.

Oh, I totally understand the point about making money off the place if prices go up, I guess what I meant to say was:

There's nothing more rediculous than LETTING people sign up for a 40 year 100% mortgage.

[I_H8_Crawford]

LOL they do it AFTER the prices are driven up to insane amounts... news to Ottawa, the bubble in Canada has already been created.

All this will do is accelerate the crash now... taking even more buyers off the market.

[Finner]

What if i wanted a 40 year mortgage with 10% down. Thats what i was potentially looking at doing. Gives me some cash flow with the reduced mortgage payment, but i can add as much extra as i want. At my current job, my salary isn't very high but i get pretty giant bonus's so i was counting on a 40 year, that i'd pay off in 30.

[photon]

Why is a 40 year mortgage inherently bad? Other countries that have centres with much higher prices have had 40 and 50 year mortgages for a while now.

What's magical about 25 years?

[Bill Bumface]

Originally Posted by I_H8_Crawford

All this will do is accelerate the crash now... taking even more buyers off the market.

Yup, it will cause the crash, if we are set up for one, to happen earlier. It keeps the bubble from getting bigger though and having an even bigger crash further down the road. Smart move in my opinion. A smarter move would have been to correct this earlier or never allow 0 down mortgages.

Originally Posted by photon

Why is a 40 year mortgage inherently bad? Other countries that have centres with much higher prices have had 40 and 50 year mortgages for a while now.

What's magical about 25 years?

40 years isn't really the problem. It's the zero down. 35 years are still allowed, and the difference in monthly payment between a 35 and 40 year mortgage is less than $100 unless you are buying something really extravegant. 40 years does allow you to qualify for something with a higher price tag though, which introduces more risk. Zero down is just foolish. If prices drop even a bit within the first few years of your mortgage and you need to sell, hello negative equity situation, hello USA.

[Slava]

Originally Posted by Finner

What if i wanted a 40 year mortgage with 10% down. Thats what i was potentially looking at doing. Gives me some cash flow with the reduced mortgage payment, but i can add as much extra as i want. At my current job, my salary isn't very high but i get pretty giant bonus's so i was counting on a 40 year, that i'd pay off in 30.

There are actually a few ways around this. If you went with a non-standard mortgage like the Manulife One or Canadian Tire All-in-one account you could pay what you can all year and then throw your bonus at it every year to reduce the principal all at once.

It might actually work out better for you in the long run. Plus you can put as much in a lump sum as you want...a lot of banks limit how much you can put against the mortgage to 15% of the initial amount.

You can use the Manulife One Calculator here: www.manulifebank.ca

[I_H8_Crawford]

IMO the biggest change comes in the regulation of the debt-income ratio.

Bringing the total debt ratio down to 45% from (sometimes) as high as 75% (!) is going to make a big difference.

Before, people who had car loans, and $10K on their Visa with a $60K/year job could still go get a 40/0 mortgage on a $400K house.

Now they will be lucky to get $220K.*

*all numbers are just pure BS from me, but people should get the idea...

[photon]

Originally Posted by hulkrogan

40 years isn't really the problem. It's the zero down. 35 years are still allowed, and the difference in monthly payment between a 35 and 40 year mortgage is less than $100 unless you are buying something really extravegant. 40 years does allow you to qualify for something with a higher price tag though, which introduces more risk. Zero down is just foolish. If prices drop even a bit within the first few years of your mortgage and you need to sell, hello negative equity situation, hello USA.

I don't think it really relates to the US situation, yes a zero down mortgage does put the owner in a negative position for the first few years of the mortgage, but that would only impact people who have to sell, and that situation happens anyway even with 5% down mortgages if the market goes down a bit..

The US situation was with sub-prime mortgages, ones where the borrowers were sub-prime. Canada has very little of this (something like 3% compared to 25% in the US).

I do see the point though, zero down, 40 years, all those things do increase the risk and increase the interest paid so increases the total cost of the home to the buyer so has a bigger impact on their productivity etc.

[Bill Bumface]

Originally Posted by photon

I don't think it really relates to the US situation, yes a zero down mortgage does put the owner in a negative position for the first few years of the mortgage, but that would only impact people who have to sell, and that situation happens anyway even with 5% down mortgages if the market goes down a bit..

The US situation was with sub-prime mortgages, ones where the borrowers were sub-prime. Canada has very little of this (something like 3% compared to 25% in the US).

I do see the point though, zero down, 40 years, all those things do increase the risk and increase the interest paid so increases the total cost of the home to the buyer so has a bigger impact on their productivity etc.

Actually the situation in the US is the main motivating factor for this, and it's been stated in some of the articles. With 5% down the market would really have to take a kicking to end up in a negative equity position. With 40 year mortgages and zero down you had people qualifying for homes very close to the edge of affordability and if a market down turn did occur it would make a lot of sense for those owners to walk away from their mortgages and buy something else, which is exactly what is happening in the states. The sub-prime factor accelerated it because a market down turn wasn't necessary to create these conditions, only a rise in interest rates. Exact same outcome though, just to a different degree.

[photon]

I know it's probably the motivation, but that doesn't make it a good motivation.

I don't really disagree with the zero-down, it's more the 35-40 year thing; it seems so arbitrary.

And being in a negative equity position is annoying but really is only a big issue if forced to sell.. they usually don't margin call your house. As long as people keep making their payments does it really matter if the house that was bought for $300,000 is only worth $285,000 now?

[Claeren]

The problem is that most people (sadly) buy the max that they can afford based on payments - not house price.

Therefore the market is not balanced. The point between buyers and seller is inflated and moved in the favour of sellers (and banks) as long as house prices grow and then crashes and destroys an incrediable amount, in America's case trillions and counting, in value that never should have existed in the first place.

I understand that in a perfect conservative world you would let people take that fall, unfortunately it is too destabilizing to society as a hole though and it is good to take action to protect most people from most people, even if some people do not need to be protected from some people.

It is worth noting that (according to the National Post) ~70% of mortgages this year in Canada have been for more than 25 years and that 35% have been for the full 40 years/0 down - with higher percentages of both in Calgary than anywhere else in Canada. That shows that affordability is gone and desperate people are resorting to desperate measures to get homes 'before they miss out completely'. In short, they are extending a bubble that should have burst 2 years ago.


Despite what speculators, real estate types and the newspapers they support through ad revenue tell you, on-going double digit home price increases are neither good nor sustainable. A couple percent above inflation year over year would indicate an economy outperforming the norm, but more than that and it is a bubble over time.


I would take this as a sign that higher-ups are finally acknowledging that Canada's housing boom is over and that price drops like (but not equal to) we have seen in the States are on their way shortly. This move will help remove some people from the fallout, forcing them to the sidelines for their own good. Buying on a 40 year, 0 down mortgage right before housing prices collapse is brutal - poeple just walk away form their homes hurting everyone (including themselves) in the process.


It is worth noting this WILL help a lot of long time home owners. It provides less support for prices in the short term but in the long term housing prices should stabilize sooner. There would be a larger group of renters and there will be less 'false demand' and thus 'false inventory' to work out of the system in Canada post-drop.


(Looks like much/all of what i said would happen in the old real estate thread is in fact playing out.

As an aside: *North American markets more expensive than Calgary? Hawaii, SanFran, NYC, LA, Vancouver (All comparable right? lol). *Prairie Cities more expensive than Calgary? 0! *Oil cities pricing compared to Calgary: $200k Houston/Dallas v. $475k in Calgary, and you get 50% more square feet on top of that! Brutal.)


Claeren.

[photon]

True about people buying to the max of their ability to pay, and I totally agree, double digit price increases is crazy and unsustainable.

For the aside, you can't really directly compare dollar for dollar, you have to take incomes into account.. affordability indexes are based on multiples of annual income or payments vs percentage of annual income.

Right now Calgary is more affordable based on income than Saskabush, because while prices there are skyrocketing the incomes are low. That's why I think Calgary is having a fairly soft landing (incomes are going up quickly here) but Saskabush could be a much more violent decrease.

[Claeren]

^ Higher incomes (and low unemployment) may (or rather will) help soften the landing i agree, but have little to do with long term housing prices.

Chicago, Dallas and Houstan - just as an example, all have after tax incomes that are quite high (often higher than here, because taxes are so low) yet have low average pricing. While cities like Hawaii, SanFran and NYC have high incomes and higher pricing. The difference is scarcity of land, not income.

Now that Calgary has re-developed the capacity in the development industry to provide tens of thousands of units, and obviously has no land restraints, there will be no upward pressure on pricing until that capacity to build dwindles (usually takes 10 years AFTER the market has fully softened) and growth picks up again. It has happened during EVERY cycle in the market. Inflation will do its work and prices will slowly drop for the next 10 years versus that inflation...

Putting it another way, housing prices in Calgary only spiked because of a lack of capacity to meet demand (< Like ALL commodities!). Now that there is excess supply there is no justification for high prices. Speculators exaggerated that spread between supply and demand to their benefit, and now we are left with a bubble that needs to be deflated 20%-30%.

(40 year/0 down mortgages helped extend the bubble last year because people who do not have time to reflect on supply/demand dynamics look at this housing not as a commodity but as a basic need, and thus stretch to buy it. That perpetuates the cycles further and falsely increases the demand for the commodity further, creating a positive feedback loop. Only once that loop is broken does the opposite feedback loop take hold, where lower prices discourage ALL buyers, further lowering prices and thus discouraging more buyers from buying until later, etc. Buyers who would have been there to buy some of that inventory are not only already home buyers, but are stranded home buyers upside down in their equity positions. 71% of Calgarians are home owners, which is about 5% higher than 'equilibrium' and an all time high. Seperately 20%-25% of Calgarians surveyed say they own at least 2 homes which means that there are more homes than potential home owners. Further, baby boomers in mass will be wanting to sell their oversized homes to fewer and fewer people that could ever afford to buy them at current prices, and the market can provide ~30,000 new units per year is need be. etc etc etc)


Property that reflects scarcity in Calgary will hold the most value (single family homes, urban inner city property, etc) while property that does not reflect its scarcity (suburban homes, suburban condos especially) will not - as they are easily replicated and therefore are not scarce.

Income has an affect, but is not a cause.





Claeren.

[SebC]

As someone looking at buying soon, crash baby crash! Didn't think about this as decreasing supply, might actually work in my favor as I have my 5%. I laughed when I read a quote about housing prices reflecting a strong economy and not being a product of speculation. Maybe in the rest of Canada, but certainly not here.

[flamey_mcflame]

Originally Posted by I_H8_Crawford

LOL they do it AFTER the prices are driven up to insane amounts... news to Ottawa, the bubble in Canada has already been created.

All this will do is accelerate the crash now... taking even more buyers off the market.

I hate to break the news to you. But;

1) People who can only afford houses with nothing down and 40 yr mortgages are not buyers.

2) The crash is not accelerated by taking these so called buyers off the list. A crash, similar to the one in U.S. and parts of western Europe, is averted by eliminating bad credit risks.

3) Crashes occur when it is cheaper for someone to walk away from a mortgage because the value of the house is lower than the mortgage debt.
When you give someone a house for free and they are basically paying rent on it, if that house does not appreciate in value, that is when these people dump their mortgages or try to sell their homes. Unfortunately, no one wants to pay the price these buyers originally paid. So, they walk away, the bank forecloses, the house is sold for a discount therefore making your house and your neighbors house cheaper. Now the neighbor realizes that their mortgage is higher the value of the house. You keep repeating this and you have a bust.

Calgary is by no means immune to having serious issues. If you look at some of the posts on the real estate thread. Many posters had stated that the price escalation in real estate was artificial in Calgary. Houses should not double in value in less than two years time. When something like that occurs, home values can not be sustained because very few newcomers and renters can afford a new home.

Although we haven't seen homebuilders go bankrupt and real estate agents out of jobs, there are major problems in Calgary. Housing starts this last month sank to 1995 levels. Think about that, our population has increased by over 300,000 people and we had 125+ housing starts. Not to mention the massive amounts of homes on the resale market. Don't even get me started on the condo market.

[flamey_mcflame]

Originally Posted by photon

I know it's probably the motivation, but that doesn't make it a good motivation.

I don't really disagree with the zero-down, it's more the 35-40 year thing; it seems so arbitrary.

And being in a negative equity position is annoying but really is only a big issue if forced to sell.. they usually don't margin call your house. As long as people keep making their payments does it really matter if the house that was bought for $300,000 is only worth $285,000 now?

If all things were static, yes. However, the problem occurs when interest rates go up. If you are on a 5 yr fixed or variable mortgage(any short term mortgage). When it comes time to renegotiate that mortgage and interest rates have jumped by even a point or two, then making the payments become increasingly difficult. Even if you love your house and you do not care if it has depreciated, you still have to make your mortgage payments. The troubling thing was Canadian economy right now is inflationary pressures and the possibility of stagflation. Governments always try to get inflation under control by raising interest rates. If Jane and John Doe are making payments of 2200 a month and suddenly their payments jump to 2600 a month, this may be untenable for them. And with the house depreciating in value, it gives them another factor to sell that house.

Debt to earning ratios have made houses a luxury commodity for many. If you were earning a 40,000 salary in the 80's, you could reasonably afford to buy a 100,000-120,000 house. Currently, if you are making 60,000-100,000 a year, it is financially very tough to purchase a 500,000 house. Housing is much less affordable than in the past.