Fears of a housing bubble in some areas of the country have moved the Canadian government to tighten up lending rules in Canada. We applaud the changes, although we're not sure the fears of a bubble were completely warranted. That said, the changes make a lot of sense and probably always should have been in place. The changes are:
- When applying for a mortgage you must qualify for a 5-year fixed rate mortgage, even if you are going to take a different rate or term.
- When re-financing you can only re-finance up to 90% of the value of your home (instead of 95%).
- Investors must put down 20% for government backed mortgage insurance on investment properties.
The goal of these changes is to decrease speculative investing, and to help ensure that home buyers are able to afford their mortgages when it comes time to renew (since rates are expected to be higher). I think it makes a lot of sense to cool down the areas of the market that contributed the most to last year's financial crisis.
"Canada's housing market is healthy, stable and supported by our country's solid economic fundamentals," said Minister Flaherty. "However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing."
There was a lot of concern that the government would increase the minimum down payment for first time buyers to 10% (from 5%). I'm glad they didn't as this could have created a short term bubble and then had a significant and long lasting negative impact on the market.
These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010.
I’m posting from Australia where we are in the middle of a considerable housing bubble. The reasons for our bubble are immigration and a relaxing of foreign investment. We were supposedly ‘lucky’ to avoid th GFC with house prices simply stalling for 6 months and then rocketing again. In the December quarter our median house price rose 9%. I think what the canadian gov’t is doing is very wise. The Aust’n gov’t put in place some populist policies like giving $7,000 to first home buyers. Just crazy. The popular view here is that the bubble won’t pop until immigration and or foreign investment rules are relaxed. No Gov’t seems willing to make that hard call as most of our ecenomic growth in the past two years is on the back of immigration. well done to the Canadian gov’t for making sensible calls early.
The headline on this should probably read “to mitigate bubble” instead of to prevent one as if we see volatility in prices as a result of the changes it would indicate that perhaps there was a bubble, though not so much locally as price increases in the rest of Canada have outpaced increases in Edmonton and Calgary.
The TD Bank economist is stating that the change in qualifying income will affect 25% of the market, that doesn’t mean these people won’t but – they’ll just buy at a different price point then possible.
They also say the change in criteria for investment property will affect 5-15% of the market. I don’t know how this will affect us locally as many of the so-called real estate investors I know are still licking their wounds from ’07 and are out of the game…perhaps new ones have taken their place. Though if this rule were in place in ’07 it would have saved some of those people some pain.
I guess we might see the pace of sales pick up for the next month. With this rule coming in June, and interest rate increases coming potentially mid year it will be interesting to see what happens to pricing or demand in certain market segments. The income required to own an average prices home at 5% down is now above the average wage in Edmonton – that could spell another price adjustment but suppose time will tell
If you don’t think we are currently in a bubble then why don’t you think fears of a bubble are currently warranted?
I think based on what has happened in the US you either have to protect yourself from the bubble you’re in or protect yourself from the bubble that could come. Anything else is naive.
5% down payment seems low especially in a volatile market, real estate has gone down 5% before. If it happens again you have people under water who are better off walking away.
I’d like to see down payments go to 10% to prevent a bubble from forming. If real estate doubles in 2 years which could happen in a balanced market and then collapses it could leave a lot of people in trouble with only 5% down.
Walking away isn’t an option here like it was an option in the United States, because mortgages here attach to the person, not the property. Bankrupcy is still an option, of course, but it’s not the same as delivering the house keys to your bank.
I’m more than a little concerned that the delay before the change will create a bubble all its own, quite aside from any debate about a current bubble. Surely there are some first-time buyers out there who are going to rush in while they can still get more money/debt based on the variable rate. And I’m also sure there are lenders who will happily give them those loans calculated at absurd variable rates while they still can (ING today tells me 1.95%, so on a family income of $50K, they’ll gleefully lend me $375K – $100K gets me $780,000, so God help us if my wife goes on maternity leave or one of us goes on long-term disability), because they have no skin in the game – they’re securitising the debt the same way American banks did, and it’s all guarenteed by the CMHC anyway.
It could make for a hard landing when that pool of buyers dries up, and another when the rates go up, as they inevitably must.
I’m really not to thrilled with the Finance Minister on this. His actions i think were a bit premature and could possibly slow down the housing market across Canada.
We are ALREADY in a massive housing bubble in Canada.
Vancouver is the least affordable real estate on Earth.
Housing prices to income are already HIGHER than they were at the Peak of the US bubble…and this is trying to nudge the barn door closed a little after the horses have already gone.
Here in Canada we are in a dillusion that only exists here in Australia…a delusion that used to exist in the US, Spain, UK, Ireland, Dubai, and a lot of other places, that have recently come to reality.