Tighter mortgage rules may impact housing prices: TD

thestar.com – Business
18 January, 2011 10:41 AM
by Tony Wong, Richard J. Brennan

Tighter mortgage rules may impact housing prices: TD

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Tighter mortgage rules may impact housing prices: TD
January 18, 2011 00:01:00

Federal Finance Minister Jim Flaherty’s move to tighten up the mortgage market may cause Canadian house prices to slip by an additional 1 per cent in 2011, says TD Bank.

The bank is already calling for home sales to drop by about 8 per cent this year compared with 2010. But mortgage restrictions introduced Monday will mean about 20,000 fewer sales this year, with the average price possibly weakening by 1 percentage point, said senior economist Pascal Gauthier.

“It isn’t a huge impact, but there will likely be some minor impact on housing prices because of the new rules,” said Gauthier.

The mortgage changes have met with general acclaim from bankers and real estate industry executives.

Though they say the tighter regulations may prompt some Canadians to purchase homes before the new rules go into effect, most in the industry feel they are prudent measures that will help create long-term stability.

“This is the equivalent of the velvet glove. It’s a methodical, incremental approach that works,” said Phil Soper, CEO and president of Royal LePage Real Estate Services. “They needed to send a message. But any market change will really be the result of the message rather than because of material policy.”

Ottawa has reduced the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.

It also lowered the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.

“You may see some buyers jump into the market earlier because of this, but by and large this will have a stabilizing effect,” said Gerald Soloway, CEO of mortgage lending company Home Capital Group Inc.

“More importantly, this helps to cool the housing market, but it also allows government to leave interest rates where they are, so everyone will be ahead in the long run.”

The Bank of Canada is expected to stay put on its key overnight rate when it meets on Tuesday.

But the bank has been in a quandary: Low rates have contributed to an overheated market, but at the same time, increasing rates would hurt manufacturers and the export market.

The new rules, which go into effect March 18, amount to a nip and tuck rather than a full overhaul. Real estate insiders had been worried the government would also raise down payment requirements. Currently, buyers can purchase a home with 5 per cent down. Some analysts had worried that the minimum would be raised to 10 per cent.

“That would have had a dramatic effect on the market,” said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals. “It’s really a fine balance between addressing debt levels and not affecting the overall economic contributions made by the housing market.”

A report last year by the association said about 22 per cent of Canada’s trillion-dollar mortgage market consists of amortization periods longer than 25 years. Longer amortizations have been popular with consumers because of the lower monthly payments.

Soloway said of the 15,000 mortgages arranged by his company last year, up to 25 per cent were 35-year mortgages. The vast majority were 30 years. “We didn’t encourage people to take the 35-year mortgage because you really don’t save that much considering you’re paying for five more years,” he said.

He noted that putting more money into principal rather than interest is never a bad idea. “The more skin in the game, the better. If you have sizable equity in your home, the more likely you’ll stick with it. That’s unlike what we’ve seen happen in the United States,” he said.

Many of his clients like the 35 year mortgage even if they could afford higher payments, because they like the flexibility of higher cash flow, said Jim Wong, a mortgage specialist with Royal Bank of Canada.

On Monday, the finance minister also announced the government is getting out of the business of insuring home equity lines of credit, putting the onus on the lending institutions by April 18.

“I think people need to demonstrate that good Canadian trait of prudence and reasonableness and common sense in terms of their debt assumptions,” Flaherty said.

“This will prevent Canadians from taking on excessive debt,” he said, noting that some Canadians are remortgaging their homes to buy boats, cars and big-screen TVs instead of reinvesting in their homes.

This is the second time in 12 months the ministry of finance has tightened residential mortgage lending rules. Previously, the amortization period had been shortened to 35 years from 40.


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