OTTAWA – Buying a first home or taking out a loan against an existing residence will be more difficult for Canadians under new rules announced Thursday, but Finance Minister Jim Flaherty says it’s for their own good.
For the fourth time in as many years, the finance minister moved to tighten the mortgage and lending landscape â€” changes that mean up to five per cent of Canadians who might be considering buying a new home will likely no longer qualify.
This time Flaherty’s cutting the maximum amortization period for government insured homes to 25 years from the current 30 years, and limiting how much homeowners can borrow on the value of their homes to 80 per cent from 85 per cent.
Those are not the only changes the government is making.
It will no longer be in the business of insuring homes that are worth more than $1 million â€” meaning buyers will need to put up at least a 20 per cent down payment or seek private insurance.
As well, it will insist that prospective buyers have the means to afford mortgage payments, property taxes and heating costs on their home. It will do so by setting cost ratios based on household income â€” a kind of affordability ratio â€” of 39 per cent for gross debt service and 44 per cent for total debt service.
“It’s a question of trying to moderate behaviour and I hope Canadians will reflect before they jump into a market at the high end,” Flaherty said.
“It will mean that some people will not buy into the market, it will also mean that some people will buy less into the market, they’ll buy a less expensive home or less expensive condominium.
“Good. I consider that desirable.”
The changes go into effect July 9.
The most significant change is the reduction to the amortization period, bringing it back to the level it had stood historically before rising to as high as 40 years during the heady pre-recession days of 2006.
The government said on a $350,000 mortgage with three per cent interest, it will increase monthly payments by $184 over what they would have been with a 30-year amortization. Over the lifetime of the mortgage, however, the homeowner will save $33,052 in total interest payments because the home would have been paid off five years earlier.
Economists generally backed the changes, with some reservations.
CIBC deputy chief economist Benjamin Tal said he wondered about the timing of the announcement, given that house prices were already receding. He estimated it could reduce new sales on homes by between three and five per cent.
That’s not an insignificant hit to a fragile economy that’s been riding the coattails of a strong housing and building boom, which supports construction activity and jobs.
“It will not derail the housing market, but it will be felt,” Tal said. “(The housing market is) already slowing and if you push too much when we are already slowing, you could fall.”
Canadian Real Estate Association president Wayne Moen called the new rules “measured,” but also reminded the government that it is courting danger.
“The re-sale housing market makes a significant contribution to the economy, adding an estimated $20 billion in spin-off spending and over 165,000 jobs in 2012,” he said in a statement.
“The impact of measures like those announced today must be closely monitored to ensure they have the anticipated impact and don’t create a spillover effect and slow the economy.”
The latest move is part of a series of initiatives undertaken recently by the federal government to slow the accumulation of debt by Canadian households, which reached a record 152 per cent of income in the fourth quarter of last year.
Also on Thursday, the Office of the Superintendent of Financial Institutions published new rules on financial institutions designed to discourage lending to marginal borrowers. They call for timely assessments on borrower capacity to service debt obligations and effective institutional risk management and even insurance against risky loans.
Flaherty conceded the mortgage rule changes will likely have some impact on Canada’s economy, but would not reveal his department’s calculations of the anticipated hit to growth.
In a speech in Halifax, Bank of Canada governor Mark Carney said the changes would reduce the risk of household debt, calling them “prudent” and “timely.”
On the impact to the economy, Carney said: “The housing market is an important component of the Canadian economy, but it’s about seven per cent of the Canadian economy, and we take that into account in analyzing the overall economy activity in Canada.”
Economist Jimmy Jean of Desjardins Capital Markets speculated Flaherty and Carney had been working in tandem on the announcement, and that the finance minister needed to act because the bank governor couldn’t. That suggests historically low interest rates are here to stay for some time, he said.
“There may have been a growing understanding that the Bank of Canada will not be able to hike any time soon,” he said.
“I imagine that they were waiting to see what the (U.S. Federal Reserve) would come up with yesterday and with what was offered, they figured that the appropriate strategy was to tighten mortgages in lieu of being able to hike rates in the foreseeable future.”
With the Fed moving to increase monetary stimulus, it makes it even harder than before for Carney to head in the opposite direct. As well, most of the economic indicators from Europe, China, other emerging countries and the United States point to slowing economic momentum and rising risk â€” hardly conditions to pull on monetary levers.
Under these circumstances, economists say Carney is poorly placed to deal with the housing market, since hiking interest rates would also damage the overall economy by discouraging business investment and boosting the dollar, thereby undercutting exports. That put the onus on Flaherty, who had the regulatory tools to specifically target housing and borrowing.
Flaherty said he could not speak on the issue of interest rates, but suggested he understood Carney’s predicament.
“I’m very mindful of the world situation and this is a challenge for us,” Flaherty said. “I’m concerned obviously that we may get a shock from Europe.
“We encouraged, the prime minister did and I did, we encouraged our European colleagues to act with some alacrity, and I hope they do. If they don’t, it’s going to be a very difficult summer.”
Flaherty said his decision to act was a “judgment call” based on observations of the housing market by both himself and his officials, saying his biggest concern is with the condominium situation in Toronto, and to a lesser degree Vancouver, Montreal and Quebec City.
“In Toronto in particular, what I’ve observed and heard about is continuous building without restriction because of persistent demand. This concerns me because it is distorting the market,” he said.
While the announcement on mortgages, leaked Wednesday night, took many by surprise, it does not come out of the blue.
Carney has been warning for several years that some Canadians are getting in over their heads with debt and that they could face problems once interest rates â€” which sit at historic lows â€” start rising or if there is a second economic crisis. He has called household debt the number one risk to the domestic economy.
Recently, the Bank of Canada estimated that the number of households in arrears could almost triple to 1.3 per cent if the unemployment rate were to rise by three per cent, about the same as occurred in the 2008-09 slump.