Business as Usual

National News 'Business As Usual' After Mortgage Rule Changes Announced For This March National News

'Business As Usual' After Mortgage Rule Changes Announced For This March
Thursday, 27 January 2011 19:13 David Hatton, Editorial Team

Daniel Bloch finally heard details of federal Finance Minister Jim Flaherty’s mortgage rule changes when he was watching the evening news.

“I was a bit surprised when I learned some of the details but it’s not too bad,” said the Century 21 Heritage Group Ltd. realtor in Thornhill, Ont. “You just have to adapt and adjust. There’s really not much else you can do.”

Almost ten days after Flaherty announced he was tightening mortgage rules for the second time in a year, realtors and mortgage brokers across the country say its business as usual.

But record low interest rates could be another entirely different story.

“I actually had three of my clients who were first time home buyers that asked about it, but others weren’t even aware of the changes. There was one other client who didn’t like it … the downpayment was already an issue with them, though,” Bloch said.

One veteran Vancouver mortgage broker, who asked not to be named, saw it as “government backtracking” on their earlier decisions. The Conservatives allowed the Canada Mortgage and Housing Corp. to lift its 25-year limit on mortgages in 2006 and insure them up to 40 years.

“Then he brought then 40-year term back to 35 years in 2008 and this was just trying to cover up on that initial decision,” he said. “Ultimately they are just trying to hide their earlier mistakes.”

“Smart home buyers should still lock in their mortgages before the changes come into effect on March 18th.”

Flaherty said he was shortening the maximum amortization period to 30 years, from 35 years, and lowering the refinancing limit from 90 per cent of a home’s value to 90 per cent. He added the government was also withdrawing insurance on the popular home equity lines of credit.

The move comes after conflicting reports about Canadians and their ability to handle debt. Statistics were released showing Canadian households were still piling on debt amid historically low interest rates. Statistics Canada analysts reported the average Canadian household debt at a record 148 per cent of income, and the debt-to-income ratio is higher than in the United States.

In a new research report released Wednesday, however, economists at the Canadian Imperial Bank of Commerce had another point of view.

"The Bank of Canada continues to warn Canadians about the risk of rapidly rising household debt, but the reality is that slowly, behind the scenes, credit growth is already softening," wrote economist Benjamin Tal, of CIBC World Markets.
Tal said that trend first showed in the third quarter of last year, with inflation-adjusted credit growth during the last quarter dropping to the slowest pace in more than nine years. He added it was also the third quarter when the Canadian critical debt-to-income ration reached the record 148 per cent.
That could mean that when interest rates rise, the carrying costs of that debt can cause problems for consumers. But it doesn’t necessarily show the national mortgage market is headed towards a meltdown similar to what happened in the United States, said Tal.

In order to trigger such a bust, the high debt levels must be accompanied by a three or four point jump in interest rates or a catastrophic event like the subprime U.S. mortgage crisis. Canada has never faced either of those last two situations, he said, and “that’s why we could have an overshoot in housing prices without having a bubble or bust.”

It wasn’t the first time CIBC economists have downplayed alarmist fears in the housing market. The bank’s chief economist, Avery Shenfeld, disagreed in late 2009 that Canadians were headed for a “U.S. style housing and mortgage blowup.”
Tal predicted this week that although high debt levels can cause stress for consumers, their financial health is otherwise strong The only risk present is that the economy will slow during an already gradual recovery.
"Inflation-adjusted growth in household credit in the third quarter of 2010 was the slowest in more than nine years, while the 0.27-per-cent increase in credit during October of last year (the latest available data point) was the softest monthly reading in more than 15 years," he said in his report.

"Consumer spending in the past two years was by far the most leveraged in recent history but this trend is starting to normalize.”

"Growth in consumer credit is already decelerating (mainly in sources that are used largely for consumption such as credit cards and lines of credit). And as the ratio of growth in borrowing to spending returns to normal in 2011, look for growth in consumer expenditures to take an additional haircut,” Tal added.

Analysts from other banks echoed the concern that record interest rates, combined with high debt loads, could still cause problems for the Canadian economy. And they might be going up sooner than most people think.
"If you believe that interest rates are normal right now, you are suffering from serious delusional thinking. They will be going higher," said Scotiabank Chief Economist Warren Jestin told a St. John's Board of Trade meeting last week.

He also predicted interest rates would continue to trend higher, and those who took on high debt may get taken by surprise and default on their loans when rates sharply go back up again.

Flaherty likely considered it important to act now rather than including the changes in the upcoming federal budget because of the risk of an election, Michael Gregory, a senior economist with BMO Capital Markets, added in his own research report. If one of the three opposition parties opposed the budget in the House of Commons, it could have sparked an election because the Conservatives do not have a majority government.

“…these measures were obviously deemed too important not to be passed and put in place for when Canada’s housing market wakens from its winter slumber,” Gregory wrote in his report.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) released their own report just after Flaherty’s announcement showing the risk of mortgage rates rising to unaffordable levels in the near future is “negligible”.

The group’s chief economist Will Dunning explained that a majority of buyers left themselves a bit of room to absorb an increase of one per cent on fixed rate mortgages and even higher on variable ones.


David Hatton is a regular contributor to PropertyWire.Ca and the owner of www.orderuniquearticles.com, a company that specializes in creating original content for realtors and their websites.