Mortgage Rules : As tougher rules slow housing market, critics call for a reversal
The real estate industry has ramped up its attack on rules making it harder to borrow but its challenges face one big obstacle — mortgage restrictions are working exactly the way the federal government wants them to. In the past week the Canadian Association of Accredited Mortgage Professionals weighed in with complaints that Ottawa’s restrictions were killing consumer confidence and even raised the stakes further by suggesting the entire Canadian economy was at stake.
Toronto builders joined the fray, calling out the federal government for rules it maintains have a lot to do with the cooling market in the city that saw sales in October dip 14% below their long-term average.
But Finance Minister Jim Flaherty has given no indication he is ready to reverse course on his tightened restrictions. There’s also the argument that it wasn’t the rules that have sabotaged the market, but rather an overall fatigue from consumers when it comes to real estate.
“I think the government is not responsible, remember the housing market was slowing already when the government introduced these [latest] measures,” said Benjamin Tal, deputy chief economist at CIBC World Markets. “In a slowing market, it is that much more effective. It was a prudent move.”
Among the changes instituted by the government was a lowering of allowable amortization from 30 years to 25 years for consumers borrowing with mortgage default insurance which is backed by the federal government. A longer amortization allows consumers to lower their monthly payment and qualify for a larger loan at the expense of paying more interest over their mortgage period.
Mr. Tal said there is something to be said for a “natural slowing” of the market which was probably accelerated by the latest changes. “It might mean a little bit of over shooting but that’s the risk that you took,” he said, adding the real question is what happens when interest rates rise or other factors impact the market.
It’s not impossible the government could switch gears and stimulate the market. It’s hardly unprecedented. In the past, Ottawa allowed amortization lengths to stretch to 40 years and, significantly, it lowered the minimum down payment needed by consumers to avoid costly mortgage default insurance from 25% to 20% — something that remains in effect. And, to this day, consumers still only need 5% down to qualify for a mortgage if they buy such insurance.
All of this will probably do very little to satisfy the critics who maintain Ottawa stepped in at the wrong time. CAAMP, among others, suggests the latest rule modifications have squeezed the first-time buyer out of the market. CAAMP said 17% of the high-ratio mortgages funded in 2010 would not qualify today, including 11% of prospective high-ratio homebuyers who wouldn’t qualify under the new 25-year amortization rule.
“The government in general is walking a tightrope here. On the one hand they are concerned about household debt and all these insured mortgages. But on the other side, housing is an important contributor to the overall economy,” said Jim Murphy, chief executive of CAAMP, which noted in a previous report that 18% of all jobs in Canada created between 2006 and 2011 were related directly or indirectly to housing.
Some, like CIBC’s Mr. Tal, suggest maybe it’s time the economy stopped being so dependent on the housing market for growth.
One executive who says he’s changed his tune on the government’s crackdown is Phil Soper, chief executive of Royal LePage Real Estate services. When the latest regulations came out in July, he was one of the first to suggest the time was wrong, but he’s gone full circle since then.
“At the time, I thought it didn’t make sense,” said Mr. Soper. “I’m being contrary again. I think the impact of mortgage regulation is being blamed far too often these days in what is clearly just a natural cyclical slowdown in the market driven by overpriced homes. We were due for a slowdown. The timing was unfortunate but it’s not a major event. I think chances of it being reversed are close to zero.”