Allow me to riff on the housing market and how recent changes to mortgage rules will affect Canadian homebuyers. To recap, the feds stepped in and introduced a mortgage rate stress test for fixed term mortgages of five years or more. The stress test, which already existed for variable and 1-4 year fixed terms, stated that prospective homebuyers need to qualify at the Bank of Canada posted 5-year rate (current 4.64 percent).
The announcement got the housing and mortgage industry (re: homebuilders, real estate agents, mortgage brokers and lenders) out of sorts, saying that Ottawa is effectively ‘nuking’ the mortgage market by imposing sweeping changes to a problem that only really exists in Vancouver and Toronto.
Are the feds killing the housing market?
The industry is upset with the feds for introducing the new rules without consultation. Sure, I get it. But don’t throw out nonsense arguments like this one from a local homebuilder in Lethbridge, Alberta:
“The federal government is placing unnecessary restrictions around Canadians fundamental right to own a home.”
Oh really? Or, how about this one from the comparison site RateSpy:
“(Prior to October 17), someone with 10% down who makes $50,000 a year can qualify for a $300,000 home purchase. That hypothetical maximum mortgage amount will plunge 18% to $246,000, once this rule takes effect.
This one regulation alone could shut out more buyers from the market than possibly any of the prior rule changes, including the reduction in the maximum amortization from 30 to 25 years (announced in 2012).”
But maybe, just maybe the feds got this one right:
A lot of talk about new mortgage rules hurting 1st time buyers. Maybe new rules will save some from biggest financial mistake of their lives
— Michael James (@MJonMoney) October 19, 2016
I’ve been there. One of my biggest financial regrets is getting in over my head as a first time homebuyer. I needed a roommate just to afford the mortgage payments, and when my roommate moved out, my finances began to spiral out of control.
That was 13 years ago. Affordability is much worse today. Read what these millennials had to say about the housing market:
“If one of us loses our job during a recession, how will we pay the mortgage on the house we just bought – which cleaned out our savings? Can we have another child while we’re still in low-physical-risk years, without putting ourselves at high fiscal risk?”
“When I first bought my condo, we borrowed six times my annual income to buy it and the mortgage payments were crippling.”
It’s not just about borrowing six times your income to buy a house. It’s about the short-term, buy at all costs mentality of homeownership that is rampant throughout the country.
What happens when one spouse loses their job or goes on paternity leave? What happens to your savings when all of your income goes towards mortgage and car payments? That’s why a stress test is so important.
CMHC will issue its first ‘red’ warning for Canada’s housing market this week, sounding the alarm over high levels of indebtedness and elevated house prices in an assessment of 15 metropolitan markets.
That’s why the feds took measures to cool the housing market. Not to deny first-time homebuyers their “right” to own a home, but to tap the brakes on a market that has had its foot on the gas for the last decade, fuelled by record low interest rates and creative lending practices.
Decreasing the maximum amount you can borrow from six times income to five won’t kill the housing market, but it might lead to more sensible lending (and sane borrowing) from a country that has gone mad for housing.
Here at Boomer & Echo we’re big fans of the robo-advisor model that gives investors the chance to build a low cost, diversified portfolio of ETFs and not worry about the hassle of buying, selling, and rebalancing on their own. Just set up regular contributions to your account and the robo-advisor allocates your dollars into a portfolio of ETFs built for you based on your risk tolerance. All of this for a tiny fraction of the cost of a managed portfolio of mutual funds at a big bank or advisory firm.
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As with the other two robo-offers, Boomer & Echo readers who open a Justwealth account will receive a $50 bonus.
This Week’s Recap:
On Monday I attempted to explain to the anti-RRSP crowd why RRSPs are not a tax scam.
On Wednesday Marie cautioned readers to avoid costly add-ons and extras on housing and vehicles.
And on Friday Marie offered some advice to parents who are still providing financial help to their adult children.
Greedy Rates lists 12 things credit card companies do that you ought to know about, but probably don’t.
Is it worth it? Squawkfox Kerry Taylor looks at the cost of premium gasoline, bottled water, and brand name over-the-counter medication.
A sensible mortgage broker says the new mortgage stress-test could be positive for Saskatoon home buyers:
“A smaller mortgage means smaller mortgage payments, so instead of being house poor you can enrich your life in other ways.”
A rebuttal to everyone who hates on new cars.
Million Dollar Journey compares the top prepaid wireless plans.
Michael James has a few concerns about Prime Harvesting, a strategy on how to handle your portfolio in retirement.
How does the TFSA benefit low income people as well as the wealthy? Rob Carrick breaks it down in this video:
Is it safe to get excited about investing again? A new U.S. service targets beginner investors with simple products and catchy names.
Meanwhile in Canada, Justin Bender explains how to build an ETF portfolio at TD Direct Investing.
How do indexers do better than average? Cullen Roche uses a fantasy football analogy to explain.
Can behavioural economics make winning strategies? Expert Richard Thaler explains how:
Finally, a cautionary tale about the taxman, the bank, and the lost $12,349.21.
Have a great weekend, everyone!