Since the 2008 financial crisis Canada’s federal government has taken several steps to cool the nation’s housing market; namely reducing the short-lived 40-year mortgages to today’s 25-year amortization period, and eliminating zero down mortgages to require homebuyers put down a minimum five percent.
These measures didn’t do much to slow down a rapidly rising real estate market, particularly in major centres such as Vancouver and Toronto. The national average price for a home in January 2012 was $347,732. Four years later that number would reach $470,297 – a 35 percent increase.
I feel for would-be homebuyers saving for a down payment in a market like Vancouver. You save prudently and wait for a housing correction, only to watch average home prices rise by an ungodly 30 percent in one year. How can you possibly keep up, and at what point do you throw in the towel and concede to a life of renting?
The rest of the country isn’t doing as well. In fact, you could argue Toronto and Vancouver have been propping up Canada’s housing market for years.
Alberta, whose economy is reeling from the collapse in oil prices, has seen a 2.7 percent dip in average house prices from January 2015 to January 2016. Edmonton is down 6.7 percent in that time. Newfoundland’s housing market is down 10 percent over the last 12 months.
But the housing industry, led by banks, real estate agents, mortgage brokers, and home builders, isn’t going to sit idly by while this gravy train runs out of steam. Oh no, housing is too important to the economy to let a silly thing like affordability get in the way of every Canadian’s homeownership rite of passage.
That’s why every week I look forward to receiving a copy of RealtyBook to discover local real estate, and once a month I get to revel in all the new show homes being built in the area with New Homes magazine.
The housing industry doesn’t just own my mailbox – it follows me online, floods my email inbox, and even embeds ads into my Facebook news feed:
Zero down mortgages?
Talk about the sign of a desperate industry that’s determined to get anyone into home ownership at any cost: advertising the mysterious “flex-down” mortgage, which encourages borrowers to use existing credit (line of credit, credit cards(!), personal loans) to fund their down payment.
Canada’s two mortgage default insurance providers, CMHC and Genworth, actually do provide information about borrowed down payments, or what they call “non-traditional” sources of down payment, including the fact that you’ll pay a higher insurance premium on the borrowed amount.
So what exactly is going on here? The federal government did away with zero-down, 100 percent CMHC backed mortgages in 2008. Then came cash-back mortgages, where banks would lend homebuyers the 5 percent down payment in exchange for a higher interest rate. That practice was quickly banned by regulators in 2012, although it was still offered by a small number of credit unions until last year.
Well, it turns out none of these rules actually prevent lenders from offering an unsecured line of credit for the borrower’s down payment – say at a rate of prime plus 4 percent. That’s where these mysterious “no down payment, ask me how” advertisements come into play. You won’t find out the exact details unless you fill out a form and sign up with the mortgage broker or home builder.
Canada’s housing industry has tried to convince us that our real estate market is different, not in a bubble, and somehow immune to a correction. It wouldn’t turn out like the U.S. housing crash because there lacked a catalyst here – that one thing that could send our housing market tumbling into recession.
But now the oil crisis is starting to cripple the economy in our prairie and maritime provinces, with massive layoffs and corporate investment abandoned or on hold.
Couple that with ultra-inflated housing prices over the last decade, not to mention the outrageous stories of mortgage brokers committing fraud, real estate agents engaging in their own dubious practices, plus this last-ditch effort to sell zero-down mortgages, and it’s hard to see this ending well for many Canadians.