The mortgage changes are all over the news today:
‘Ottawa caps insured mortgages at 25 years’
– CBC, 21 Jun 2012
‘Flaherty clamps down on mortgage rules to cool overheating market’
– G&M, 21 Jun 2012
‘How Jim Flaherty’s new mortgage rules will sink house prices’
– G&M, 21 Jun 2012
‘Canada toughens borrowing rules to cool housing market’
– Reuters, 21 Jun 2012
‘Finance Minister Jim Flaherty tightens mortgage rules’
– Vancouver Sun, 21 Jun 2012
‘Canada Tightens Mortgage-Financing Rules’
– Wall Street Journal, 21 Jun 2012
[“Canadian Finance Minister Jim Flaherty dramatically tightened the country’s mortgage-financing rules—the fourth time in four years—as officials here struggle with what they have increasingly worried is an overwrought housing market.”]
‘Canada’s Flaherty Tightens Mortgage Rules to Avert Bubble’
– Bloomberg, 21 Jun 2012
‘Ottawa’s new mortgage rules will lead to ‘long-term stability’: Carney’
– G&M, 21 Jun 2012
‘Shrinking CMHC, the beast at the centre of housing market’
– G&M 21 Jun 2012
“Flaherty also moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent in order to get CMHC insurance. Those two ratios are technical limits on how much debt a borrower is allowed to take on as a percentage of their overall income. This move, too, is aimed at making sure a borrower can’t bite off more than he or she can chew.
The final change was to limit CMHC insurance to homes priced under $1 million. In addition to not being able to access CMHC insurance, Flaherty said the new rule will be that a buyer of a home priced higher than $1 million must have 20 per cent or at least $200,000 down.
“Wealthy people can borrow whatever they want from banks, and they can work that out from banks,” Flaherty said. “That is not my concern.””
– CBC news, 21 Jun 2012
Some find the moves surprising, but we don’t. This is an attempt at using the ‘scalpel’ that many have called for. The BoC is unable to raise headline interest rates to curb RE borrowing, so the mortgage tools have to be used. Canadians were not listening to the calls for prudence, and RE continued to run up in fashion that we know those in Ottawa know is a speculative mania. They are trying to rein this in, and, perhaps as important, they are wanting to be able to say they acted. When Flaherty says “Our government has encouraged Canadians to borrow responsibly; most Canadians have done so”, he wants to now be seen as having stepped in to curb those who were incapable of curbing themselves.
Overall we agree with the moves, they are in the right direction, they will make it harder for people to overextend themselves into mortgage debt, and there will be downward pressure on prices. Any moves that bring housing prices more in line with fundamental values are to be encouraged.
We also see the irony (pointed out by the majority of commenters at sites like the CBC!) of Flaherty now wanting to look prudent when he is in actual fact simply reversing his own prior imprudent moves. It was he who increased amortization length to 40 years in the belly of the mania. He got his timing wrong, as Governments almost always do during manias, and we suspect history will prove this to be true.
The $1M cap is of interest to those watching the SFH markets in Vancouver.
Of course, the average SFH price here has yet to drop below $1M.
Even prior to the introduction of this rule, most SFH buyers over $1M in Vancouver have had >20% downpayment, but a minority haven’t. (We don’t know the exact break-down and we’re not sure if they’ve ever been published anywhere).
But, despite this, we expect this new rule to now spook both the ‘low-ratio’ buyers (those with over 20% to put down), and, more important, the banks. We suspect they realize the market is vulnerable, and they’ll get stricter with everybody, even the person trying to buy a $2.4M west-side Vancouver home with $800K or $1.2M down. Perhaps especially that kind of buyer. So it’ll be of interest to watch the effect of this change on the high-end areas.
We’d also expect the rule to offer some temporary support for Vancouver SFHs in the $800K-$1M range, as one will assume there will be buyers at those levels who previously could have stretched to >$1M but now can’t. We have previously predicted that the most likely trajectory for Vancouver prices would be a drop to 2009 lows, a bounce, and then a plunge through to a trough target of 50%-66%-off the highs. These new rules may speed the drop to below $1M, offer some transitory support just below $1M, but not make a big difference to the ultimate price targets.
These mortgage changes will likely speed the demise of the Vancouver RE bubble, and we suspect they will give some folks something to blame on the way down. Prices were set to collapse of their own accord, regardless, but most people like to be able to point to a cause.