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.
Final thoughts
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.
