What the new mortgage rules will mean for Canada
Tough times call for tougher measures — especially for mortgage loans.
Whether you are a hardcore hater or just a recreational grumbler, it's pretty tough to find fault with the federal government's decision to tighten up on residential mortgage borrowing.
Finance Minister Jim Flaherty has just taken some big steps toward insuring that the frantic Canadian real estate market cools as gradually as possible — and that the much-foreshadowed increase in domestic interest rates doesn't wreak havoc on debt-hobbled households when it finally comes.
Flaherty has taken four steps: reducing the amortization period for mortgages to 25 years from 30 years; lowering the amount that Canadians can borrow against their homes to 80 per cent from 85 per cent; constraining maximum gross debt service ratios to 39 per cent and maximum total debt service ratios to 44 per cent; limiting government-backed mortgage insurance to houses under the $1 million threshold.
According to experts, this blast of chilly air is the equivalent of a one per cent interest rate increase for the real estate market. And it precedes even tougher borrowing terms that are about to be imposed by the federal bank regulator on the home equity lines of credit that chartered banks have been tossing to people at every turn.
Those measures are especially important because while Canadians have started to come to grips with their consumer debt (which had the slowest growth in two decades in February when it increased just 2.3 per cent year-over-year), mortgage debt has continued to muscle ahead. That, despite the fact Ottawa has tightened mortgage lending rules three times since 2008.
Although it has slowed since the recession hit, residential mortgage credit has continued to grow at between seven and eight per cent a year for the past three years. To a large extent, that's been driven by soaring house prices. The average price of an existing home has increased about 30 per cent over the past three years.
The fits of housing market volatility, however, have signalled that the days of steady — if unsustainable — expansion are now over. The latest household income results make it clear, furthermore, that the lack of income growth is going to make it really hard to pay down existing debt loads. Especially if interest rates gradually climb, as expected, by two per cent by 2015.
The Canadian Association of Accredited Mortgage Professionals estimates that about 21 per cent of current mortgage-holders could be squeezed by the advent of higher interest rates.
The government's latest four-step program, however, has taken some pressure off the Bank of Canada to raise rates. Because real estate-levered household debt is a very specific issue, monetary policy would have been pretty heavy artillery to use against it.
By increasing rates now, the central bank would have pushed the Canadian dollar higher, battering exports and any signs of economic growth.
There are, however, a few peevish points to make about this path of righteous responsibility.
First, let's remember that Flaherty, who is now reining in mortgages, is the same guy who increased amortization lengths to 40 years in 2006. (The same year that CMHC began insuring mortgages 100 per cent.) Prior to his tenure, the historic amortization period was 25 years.
It makes sense, then, to at least roll your eyes when he notes, as he recently did, that his reduction of mortgage amortization rates to 25 years on a $350,000 mortgage will save a Canadian family $150,000 over the life of the loan.
It's also mildly ironic that a government that came to power with a Libertarian-Lite agenda, is getting all up in the grill of the domestic economy and micro-managing things like a family's debt ratios.
And then there's the assertion that anyone who buys a house worth $1 million is "wealthy" and, as Minister Flaherty said, "not my concern" when it comes to mortgage insurance.
At the risk of sounding snotty, there are lots of Canadians buying houses in that price range who are not wintering in St. Bart's or driving limited-edition roadsters. In fact, they're not especially wealthy at all. As noted earlier, house values have climbed about 30 per cent in the last three years and in several markets bidding wars are still common.
That's not to take issue with the fundamental merits of the latest moves. Just saying.
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