Doors shutting on first-time buyers
REAL ESTATE REPORTER
The Toronto and Vancouver housing markets have cooled rapidly in the wake of Ottawa's latest bid to stop a bubble, with many first-time buyers knocked out of the running.
Finance Minister Jim Flaherty put the July 9 changes into effect to curb growing mortgage debt levels and take some steam out of house prices. Among other things, the new rules cut the maximum length of insured mortgages to 25 years from 30.
The changes have sparked a debate in Canada. Some industry players and economists worry that the impact will be so widespread and long-lasting that they want Mr. Flaherty to consider rolling some of them back. But with prices that some still deem overvalued and new fears over consumer debt, others say the changes aren't enough and must be followed by a hike in rates.
Among the latter is Toronto-Dominion Bank chief economist Craig Alexander, who estimates that national home prices are 10 to 15 per cent too high.
He released a report on Thursday predicting the July changes will shave three percentage points off of prices and five points off of sales by next year.
"Our models suggest that had the government not tightened lending mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160 per cent this year - the level that households in the U.S. and U.K reached before sending their economies and housing markets into a tailspin," Mr. Alexander wrote.
Although the mortgage insurance rule changes have curbed house sales and debt levels somewhat, the impact on prices has been relatively fleeting, Mr. Alexander said. Without rate increases, consumers still have a strong incentive to take out large mortgages, fuelling overvalued prices, he argues.
The impact of the changes is predominantly being felt by first-time home buyers because they are typically the ones who require mortgage insurance. Insurance is mandatory in Canada for borrowers who have a down payment of less than 20 per cent, which has traditionally been about 35 to 40 per cent of the market.
Brian Hurley, the CEO of Genworth Canada, the second-largest mortgage insurer, said business slowed in August as a result of the rule changes.
"These are pretty dramatic changes, and I think they're getting close to the tipping point," he said in a recent interview. "We see really qualified first-time home buyers with very high credit scores now not meeting the bar because they can't afford a 25-year amortization. These people should be getting a home."
Eric Lascelles, chief economist at RBC Global Asset Management, approves of most of the rule changes, but said there is a risk that they are being overdone to compensate for ultra-low mortgage rates.
"I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized and 25-year-olds are being told they cannot make mortgage payments past the age of 50, even though they expect to work until 65," he said in an e-mail.
Traditionally, the banks have applied mortgage insurance rule changes to all mortgages - even those with large down payments that don't require insurance. But that hasn't been the case this time, Mr. Alexander said.
"The banks are basically not applying the 25-year limit to the non-high-ratio mortgages," he said in an interview. "That's one of the reasons why the mortgage insurance rule changes had a more muted impact on the market, because really the segment that's being significantly hit is the first-time buyers."
On Thursday, the Toronto Real Estate Board said sales of existing homes fell almost 12.5 per cent in August from a year ago. But the average price rose almost 6.5 per cent, to $479,095. One day earlier, Vancouver's real estate board said August sales were the second-lowest level for that month since 1998, while the average price of a home was down 0.5 per cent from a year ago.
IN GREATER TORONTO
Decline in number of sales in August, 2012 over August, 2011
Average sales price in August, an increase of 6.4 per cent over August, 2011
Decline in number of new listings over August, 2011
Toronto Real Estate Board