Canadian government says, “No more 40-year mortgage for you!”

I don’t think this will have that much of an impact because the banks always had tighter lending standards anyways, and 40 year mortgages are not the same as sub-prime mortgages that start you off at 1% interest and reset to 5% 6 months later.

Either way, this IS a good move regardless.

Personally, I wish they would go further and over the next 10 years (in 5 year stages) enact a law that limits mortgages back down to 25 years at most.

Having foresight rather than hindsight is a great thing. Props to our government for stepping up to the plate on this one! :’D

While the housing boom is already over I think this move will help in multiple aspects. Canadian’s overall debt being one. It would be better to have the downpayment policy at 10% instead of 5% though. Going back down to 25 year amortization would be nice too, but it’s probably unrealistic now.

Good points jrochest. I wonder if there will be a mini-boom of “underqualifiers”…

jrochest,

Your points are good. As I see it, though, it’s difficult to imagine people lining up at their local mortgage lender rushing to get in under the wire. Do you think most lending instituations will hand over highly/completely leveraged $$ at insane levels and then “shut off the tap” on October 15th? I don’t think they’d be very forward thinking if they did, especially as this will very likely lead to a further deceleration in housing prices. Why would they want a hugh pool of people with negative equity? Huge risk for them. Just doesn’t make sense to me. You think they would err on the side of caution and deny any borderline cases before the new lending rules take effect.

What do you think? I would like to think that lending institutions would be smarter about protecting themselves than this… but who knows. They may not be worried, as CMHC is covering the banks, not the consumers.

Another potential load on the taxpayer’s backs, perhaps, if this all goes really bad.

Re: my response yesterday to “Jen”:

“If you don’t think that credit is going to be harder to come by globally due to this, I’m afraid you’re sadly mistaken.”

Later, the same day, credit contracts.

Called it!!

Oh — and this isn’t mentioned in the article Norm links to, but there’s also a new Gross Debt Ratio of 45% — that means that less than 46% of your gross income can go to debt. And this includes *all* debt, including student loans, car loans, lines of credit and other instruments. In places like Vancouver, where most people carry a 70% loan-to-income ratio, or where they routinely borrow the down payment as well as the principal, this will torpedo the entry level market.

They used to have a regulation against borrowing the downpayment, too. Don’t know if the GDR won’t have the same effect.

The old regluation was that the mortage itself could be no more than 32% of income: but they didn’t look at your other debt.

I’m confused.

If the cap is “going to be” 45% on the total debt service ratio, and Norm says the TDS is CURRENTLY capped at 44%, what’s really changing?

Sorry in advance. Need food. Blood sugar low. UGH.

Crikey — I agree: I posted before Norm’s post showed up, and I had the same response. Why mention this if it’s not a change?

Scott — None of us are worried about not qualifying for a mortgage: we’re all quite pleased at the idea that this will cool the bubble and dampen speculation. That’s not negative — it’s positive.

I like houses.

I like relevant posts.

Ha ha ha! You guys just made my day! (What can I say, I’m easily amused).

Well I guess it’s better off than I initially thought anyway. I thought the TDS limit was only 40% to begin with.

Well, I think for speculators — or investors who plan to rent, to be fair — the super-duper low interest loan is part of the plan, since it keeps costs low and allows them to make the profit they need.

But they intend or hope to carry the property for a couple of months, not for 40 years!

; ) I don’t want the Canadian housing market protected. I want it to crash-crash-crash!

I believe it would be ironic if all the bears on this blog bought a decently priced house from a correction then shortly after the housing market crashes leaving them upside down. I would let out a great laugh then post, “You got what you wished for!” or something witty like that =o)

In a market where the average house goes for $300,000, this shouldn’t be too much of a damper. In a market where the average price is $700,000, this could dampen the market.

Those who have already bought (or about to buy) with zero down and 40 year amortization will soon be questioning their decision. Here are the facts associated with purchasing a 450K house under these conditions:

CMHC insurance is 3.7% or 16.7K

Property transfer tax 7.0K.

Legal fees 1K

Building inspection .3 K

Total purchase price is 475K and a mortgage of 466.7K on a property with a market value of 450K. The monthly mortgage payments @5.5% fixed, 40 year amortization are 2.4K. Add in property taxes and the PIT is 2.7K per month.

The day they buy the property they are “upside-down” on their home purchase with a mortgage that exceeds the current market value. They might have to sell for a myriad of reasons (marital problems, job loss, ill health etc). If they sold for 450K with an agent using typical commissions they would net 433K for a total loss of 42K and a payment to the bank of 33K less the small amount of principal already paid.

What if the house market value drops by 10% over the next year? Selling would result in a loss of 87K and a payment to the bank of 72K. If they keep the house they keep paying that PIT of 2.7K per month. Talk about being between a rock and a hard place.

Roger,

Fortunately were in Saskatoon, where according to realtors prices only go up, and up, and up! Buy now or be forever left on the sidelines!

“according to realtors prices only go up, and up, and up!”

Poor Norm. He puts up with so much.

The reason Norm’s blog out does lesser blogs, like Doug’s hated saskhouses blog, is Norm does publish pretty much anything relevent or of interest.

I still find most real estate agents tell clients “Don’t worry, it will go up” and then amongst themselves “We need buyers, if we can’t find more buyers prices are f’d”. Partially paraphrased. From a friend who works at a real estate office. Definitely, the stuff they tell clients, and what they actually think, makes me a lot less respectful of the average real estate agent.

Maybe just a bit, but decreasing the amount people can qualify for (shorter amortization) and forcing bigger down payments, has to drop prices from what they would other wise be, it’s less buyers with less money.

And of course there is the alreay over stocked and still increasing sales inventory of over valued houses…

“Central bank should raise key interest rate, expert group says

http://www.cbc.ca/money/story/2008/07/10/howe-rates.html?ref=rss&loomia_si=t0:a16:g2:r3:c0.136656

”

Not universal, but potentially more ominous mortgage news.

That’s much faster than I expected. At this rate, the 40 year product will be off the market before September….

Mithan,

When markets change it can happen very quickly. Here in Victoria we had inventory go up quickly just like Saskatoon (my old home town). Sales dropped for a couple of months and there were a few “cooling articles in the newspaper. This is what happened to house prices in the centre of Victoria: http://tinyurl.com/5ebafb The rest of town has also softened somewhat but these high end homes were the first to drop.

I just wanted to add my 3cents to the regulatory issue.I agree with Crikey this is a necessary step at with terrible timing. But there were two issues of poor timing on the govenment’s part.

The relaxation of the financial criteria necessary to purchase a home further fueled a housing market that was already pretty lively.

Now in the aftermath we are left with huge inventories and local markets attempting to sort their way through the corrections. This new development couldn’t have come at a worse time.

Given a level playing field most markets will sort themselves out. Government intervention is usually unnecessary.

Prices will probably take three or four years to fall from the peak: I was in Toronto in the last boom/bust. Prices peaked in 89, and it wasn’t until 94 that things trickled down to the rental market enough for me to rent my own one bedroom apartment instead of sharing with roommates — in other words, the price of a one-bed suite in a basement was as cheap or cheaper than a room in a shared house. And by 95 or 96 I was living in buildings, first low-rise and then high-rise, for about the same price. Rents and prices stayed comparatively flat for the whole of the 90’s.

And prices did come down considerably, even in a market that had lots and lots of potential buyers.

I think it will take longer than people think but I also think that prices will fall lower than people expect. I’ve said that I expect all of last years bubble gains to evaporate, and I stand by that. I think it will take several years — four? five?– though.

What’s happening in the US — Indymac shut down, Fanny Mae and Freddy Mac in major trouble — is scary enough that I wonder if things could be worse this time, though.

I think Roger’s link to the graph of Victoria’s housing prices illustrates well how fast prices can fall, once inflated inventory and over valued housing is realized by the general population.

I think prices will fall now, because of hugely increased inventory in Saskatoon and for fear of upcoming mortgage changes. This may be gradual over coming months. Some are calling for a temporary increase in sales pre-mortgage changes, maybe, but should be at lower prices, as everyone will be expecting prices to drop in a few months, no point in buying now, if you still will qualify for a mortgage in 3 months, and know houses will be cheaper.

I think prices will fall again, more sharply, once amortization periods are made shorter, and everyone is forced to come up with a down payment.

I had previously predicted a 10% drop in Saskatoon housing prices from April 2008 to January 2009 average, and will stick to that for fear of being called a “flip flopper” but with mortgage changes that will make everyone’s maximum they can spend less, and force all home buyers to save up a down payment, still relatively low Saskatoon incomes, and increasing inventory, I am thinking the actual drop will now be significantly more, 15% plus! Likely to hit high end houses (expensive, takes long time to pay, big down payments) and low end (potential buyers already tetering on being able to buy vs. rent, now no longer able to afford mortgage.)

So added to down ward pressure from increased inventory and Stonebridge not selling, is down ward price pressure to meet new lower mortgage amounts approved for buyers – ie. what they can actually spend on a house.

Patrick said,

“So with all this talk of increasing interest rates should I be switching my variable mortgage to a fixed interest rate?”

That’s a toughie. Here’s a link to a site called “Mortgage Intelligence”:

http://www.913wise.ca/section/view/?fnode=37

It states at the bottom of the page:

“Experts now agree with the benefit of hindsight that over the past ten years one would have paid less interest by taking a short term or variable rate mortgage versus a longer term mortgage. But that strategy might not be for everyone. Your honest answers to the above questions will help guide you to your best choice. The only sure bet to protect yourself against future interest rate hikes is to opt for a longer term fixed rate mortgage.”

However, the over the last 10 years (particularly the last 7), interest rates (interbank lending rates) have been historically low. I’m not sure this will continue to be the case.

Good luck!

Norm: “So, are you actually thinking that we’ll eventually see averages that are close to those seen at the end of 2006?”

Yep, I do; I know that seems bonkers, and it may be. But this kind of sudden, massive spikes have completely flattened out in every other RE bubble. I do think the increases of the previous years — which were steady and solid — will probably hold.

Except for the apartment/condo conversions, which I think are royally, royally scr*ed. The recent conversions have flooded the market with these things, and I think the prices will drop below where they were in 2006.

Bluntly put: I have two friends who have bought condo conversions. In both cases they think they are the only owner-occupant in the building: in one case, my friend is often the only occupant of the building at all, as far as he can tell.

He says it’s a little creepy.

My other friend is in a building that’s fully occupied, but because the building is filled with a patchwork of tenants, all of whom have different landlords, there’s a series of problems which don’t happen with a single landlord. There’s no on-site super, which means that the tenants have no-one to complain to about noisy parties or bad neighbors, and there is no-one to deal with damaged amenities in the public space (doors, windows, carpeting), or with behavior like people propping the doors open to allow access to the building or parking in a spot that doesn’t belong to them. If the management company doesn’t shovel the snow or deal with ice, or if the heat or hot water have a problem, it’s the absentee landlords’ responsibility to complain — the management company won’t respond to the complaints of tenants. And the absentee landlords don’t know how to screen tenants, so she has had some *creepy creepy* neighbors, and the turnover in the building is bad.

In other words, it’s less appealing to rent one of these units than to be a in a single-landlord building. And if you own, of course you can’t just move when the next-door neighbors are brewin’ up meth in the bathroom.

I think that the absence of 40 year mortgages will effect everyone: they meant that people who wouldn’t be able to buy, could; they also allowed those who could buy at the lowest level of the market to pay more. So they helped inflate the bubble by allowing more bidders into the auction, and by raising their bids.

Norm/Crikey,

Coming from a person who’s talked to a few different mortgage brokers over the past year, they will actually TRY to SELL you on 40 year mortgages! I repeated countless times “no, we’re not interested” but they insisted “you can benefit from lower monthly payments NOW, and change the amortization later on”. Wow. Now why would they push this on those who have the means for a regular mortgage??? Anyway, this certainly will have had an effect on the 40% of first time home buyers who bought into it. The damage is already done from the housing boom, but higher standards will better protect people in the years to come.

Norm,

“Hopefully, those that utilized the 40-year product will work diligently to pay it down quicker.”

It’s a nice thought, but I wouldn’t count on it. Sure I might be a slightly pessimistic regarding the future of mankind, but sometimes it just comes down to saving people from themselves, hehe. These higher mortgage standards won’t help leaps and bounds, but it’s a start.

Alex,

You’ve proven far too discerning and thrifty to remain on a 40 year mortage for it’s entire duration. I’m sure you’ll take advantage of increased payment options and switching to a shorter amortization once feasible.

I’m addressing the consumer epidemic of mass proportions in regards to frivolous spending. Many people in our country keep their debt payments minimal so they can still afford their new leather furniture, 52″ plasma TV, hot tub, newly leased vehicle payments, and whatever else it takes to keep up with the Jones’. I could be wrong but I don’t think this applies to you.

A question back atcha: now with the government no longer approving 40 year mortgages come October, do you feel this is an injustice to Canadian citizens?

I think this will have a fairly significant impact, especially in the lower range of the prices.

As a lawyer in Saskatoon, I’ve helped a lot of first-time buyers sign up their mortgages. Over the last year I’ve seen, at most, two first-time buyers without a 40 year mortgage. In about 10-15% of those mortgages, the buyers probably could have afforded to amortize for a lesser period. Also popular amongst first-time buyers is the variable rate mortgage. If the interest rate is adjusted tomorrow, there will certainly be a good percentage of those buyers locking in their rates.

The way I see the market since 2005:

1. Speculative foreign investment fueled by government marketing schemes both extra-provincially and internationally (to the U.S.);

2. The above created a false increase in demand, which in turn made prices rise sharply (by ‘false’ I mean buyers that aren’t actually occupying);

3. Investors ditched property in 2006 and buyers began to become used to higher prices. Lay persons (ie. not investors) jumped on the band wagon and began ‘flipping’, which again created a shortage and false demand;

4. As one poster stated above, realtors began hyping the market by stating a strong upward trend (not you Norm, you’ve been very facts based all along);

5. 2007 remained strong with supply being short. New developments continued that would come on the market in late 2007 and 2008.

6. 2008 – Supply finally met demand and investors ditched or are trying to ditch the last of what they have – some investors such as the stonebridge speculators are getting stuck with lower prices.

7. Once all of the condo conversions / flipped houses hit the market this fall, the glut in supply will be overwhelming. My prediction is that winter 2008/09 will see decreases in pricing in the range of 15% – a trend that will continue a downward spiral for at least 4 to 5 years until things level out again.

I knew this market was doomed when I saw that newspaper article about the house across from the Farmer’s Market being sold for $175K to an extra-provincial investor – a house that two years prior could have fetched a higher price being burnt to the ground than sold.

Alex:

Why would prices stay the same? The owners who want to sell will still want to sell: holding property costs money, and even though lots of people think they’ll “hold on to their old house until the price goes back up” very few people will want to do this beyond a year or so.

Prices have to come down for the properties to sell: they may be sticky, but they’ll come down.

And I agree with almost everything Ryan said — except that the glut in supply is already overwhelming and will become more so.

Jrochest

I’m in full agreement with Jrochest. As someone who was put in a position where I had to carry my house after moving here it was NO fun. It’s not JUST mortgage payments. Now yes it was a mobile and it was in Kelowna, not here, but I think it’s pretty much the situation for any home. Mortgage payments. Increased insurance because the property was vacant. My insurance only covered fire and explosion which they said was standard in a vacant mobile, not sure if houses are the same or not. Anyway… Eletricity (that wasn’t too bad) gas, that was still bad. Property taxes. Yard maintenance. Plus the stress of anything happening to it. I mean imagine not having any showings for a week and a pipe has burst. How would you know? And then you are screwed. The stress of carrying a vacant house is terrible and the expenses are many. Plus you don’t really want to rent in case there’s damage done to it. And I think it’s tougher to sell when you have renters, especially if they don’t want you to sell. I’ve gone to a couple open houses here with renters they were dirty dirty dirty. Hard to see past that as a buyer. Oh and one guy was *cough* “growing tomatoes in the basement”. So…if spec homes are sitting and not being renters..there will be panic I am sure.

Also I don’t see people straining to buy right now. Everyone is scared of the US situation. Everyone is predicting market declines across the Canada. And if everyone thinks a decline will happen, then it will. Property is only worth it’s perceived value. I see for sale signs on every street I drive down. It’s almost overwhelming. So why anyone would strain to get in on that and buy at the onsite of a correction is beyond me. I won’t…unless it’s a reeeeeally sweet deal.

price reduced often seems like a scam, where they reduce it a couple thousand from a ridiculously over priced level just so it “seems” you’re getting a deal

Alex,

I’m going to disagree. Similar to the laws of supply and demand which we are ALL too familiar with now, when less options are available for mortgaging a home, less people will be capable of buying in. With less first time buyers there will be more inventory on the market. With more inventory and less buyers comes price reductions. People can’t hold onto properties forever. I’m confident prices will correct more than enough to offset the 5 years lost on those mortgages. (in accordance to where the market peaked anyway – I doubt prices are going errode back to anything I’d still consider “reasonable”)

Alex,

I agree that supply and demand isn’t cut and dry. It certainly is a great excuse allowing greedy people to sleep better at night after overcharging for the services/products. (ie. contractors and their $225/sq ft, hah!) Now the tables have turned giving buyer’s more power. Supply and demand must play by the same rules, it’s only a matter of time. (and of course there’s more resistance on the way down)

Another layer of regulation that is not necessary. If a lender and a borrower agree to a 40 year mortgage why should some antiquated regulation stop. It is their decision and their consequences. Or could it be the failure of political will to stop bailing out bad mortgage institutions on the backs of taxpayers. Speaking of absurd regulation, our own city of Saskatoon has similarly ridiculous controls. If you are an entrepreneurial individual and would like to build a house in your spare time and then live in it for less than 4 years before you sell it, the city takes $50,000 from you. The following excerpt is taken right off the city website:

Do I have to live in the house built?

There is a four-year residency requirement for the purchaser, beginning from the date the lot is completely paid out. A $50,000 forgivable mortgage will be placed on the property and will be exercised for those not maintaining the residency requirement or the two-year construction requirement. The $50,000 mortgage will be removed from the property after both requirements are met.

True north strong and free – ha ha ha

George,

There is no such thing as an amateur speculator! If so, who are they? If a person believes that there exists economic rents to be earned (namely high margins for general contractors) let them assume the risk. If your analysis is correct, why is anyone building, (even via a contractor)? You make your decisions based on your information set. You can try influence others decision through debate not through regulation. There is no room for civil government to try curb the incentive unless you believe they are beyond making bad decisions. This is merely a blatant attempt to try sustain high housing prices, a clear example of political rent seeking. A boom doesn’t go wrong. Supply eventually catches up. Let the market bring about the necessary supply response from individual or from builders.

What happens to those who want to general contract there own home and for external reasons (career promotion, etc) they need to move. Why should thier location decision come at a $50000 additional cost. See the spillover problems from arbitrary goverment regulation.

“There is no such thing as an amateur speculator! If so, who are they?”

There are millions in the US, thousands in Calgary right now.

Not sure what the numbers are in Saskatoon, but anybody who bought within 15% of the peak and try to sell will prove to be amateur. Probably anybody who bought Feb 08 and on and are trying to flip.

Amateur = money loss

I don’t believe that speculators are good for a market. I believe long term investors are good for a market.

Take away 0 down mortgages, 40 years, not being able to get 2 or 3 more properties and if this 50,000 city mortgage was in place in 2006 we do not see the huge run up in prices the last couple of years. There would have been few if any bidding wars. Bidding wars and speculation were what caused most of our price runup.

Our market was ripe for speculators last year, but if they could not get into the market we would have a very healthy market right now. Hovering in the low 200’s I would suspect.

@ SK Economist:

There never was a shortage in supply as you would have us believe. The supply shortage arose from foreign investment speculators purchasing supply to flip (turn around time being roughly 6 months to a year). This has become even more apparent now when new developments, such as stonebridge, are coming onto the market where demand is satisfied. If there was such an increase in demand and a supply shortage, we would expect the new developments to be snapped up right away. We are not seeing that right now.

This could be done in any market, not just real estate. Say Saskatchewan has 10 barrels of oil. I want to create a false shortage of oil so that the price will increase per barrel. I purchase 7 of those barrels, leaving three on the market. Supply being 4 barrels, the price now rises due to the shortage. Months down the road, with the price now being higher, I place those barrels back on the market, and all of them sell at the higher price.

Yes, it’s a terribly simple example of what in my mind happened in Saskatoon, but I believe the example to illustrate the point myself and other posters have made here. There was enough supply on the market to hold prices post-2006 but for foreign investments taking supply off the market to flip at a higher price. We would have seen a gradual increase of at least 15% over those two years had the investors not got their grubby hands in there. But prices increasing by 150% is clear market manipulation by speculation.

I am not saying that supply and demand will/has not caught up. I am not say a bubble didn’t exist. The problem started many years ago with government backed mortgages. The example was ok, It demonstrated the point you were trying to make. I don’t think for a minute there were people trying to corner the Saskatoon real estate market. They simply responded to a profit potential, not that foreign of a concept to you I hope. Its just that housing booms in a small city like Saskatoon don’t last as long like they do in Calgary, etc. It doesn’t take long to build through a housing shortage (which you agreed there was – The supply shortage arose from foreign investment speculators purchasing supply) real or percieved or whatever adjective you want to attach to it. If someone has a good source of data on people owning a finished house (less rental property) and not living in it over the past couple years it would be interesting no doubt. I think another one impact was local individual building a new home with the expectation that they would be able to sell their current home for a really high price indefinitely. It appears that there exists an expectation that ones property values should follow some magic constant upward rate over time; it has but not soundly (they have because of tens of years of government inflation.) This is not wealth creation, its was borrowing on my generation.

I do think that we will see downward price pressure, and that’s ok. However it still doesn’t add or take away from the point that governments should probably not insure mortgages. Furthermore, it still doesn’t take away from the fact that people, if they so choose, should be able to build a house on thier own and have the freedom to sell it within four years without have the City of Saskatoon take $50000 dollars from them. A house price is a function of the inputs used to create it (land, labour and material). Which of these have taken the biggest jump, labour and contracting costs. This draconion policy does not apply to those that buy a house through a contractor or a home building company. Only to an individual that doesn’t want to give excess amounts of money to a general contractor. I liked your comments, good debate.