Canadian Mortgage Changes

“Mortgage changes followed concerns about housing crunch in Canada

by Julian Beltrame, The Canadian Press”

“OTTAWA – Concerns that cracks were beginning to appear in the foundations of Canada’s housing market were behind the government’s surprise decision to crack down on loose mortgage conditions ushered in less than two years earlier, officials and experts say.

Starting Oct. 15, Canadians will no longer be able to purchase a home with a government-backed mortgage with a 40-year amortization and no down payment.  

Instead, mortgages will be limited to 35 years and the government will only insure 95 per cent of the value of the home, meaning buyers will need to come up with at least a five per cent down payment. As well, borrowers must demonstrate that debt servicing costs are no more than 45 per cent of gross income and have a good credit rating.

But while most in the housing sector welcomed the announcement, they also questioned the timing. The Canadian housing sector is cooling after six torrid years of growth.

Bank of Montreal deputy chief economist Douglas Porter said the decision should have been made a year ago, when Canada’s housing market was likely exhibiting signs of a bubble as both prices and starts increased by double-digits over the previous year.

“It’s better a little late than never and better than ridiculously late,” Porter said.

“I think in hindsight, we can attributed a lot of the very strong conditions we saw right across the country in 2007 to the loosening up of rules in the prior year,” he explained. “At the time, I was a little concerned that the Canadian housing market just continued to thunder along last year when the fundamentals were starting to move against it.”

Liberal MP Garth Turner, who recently authored a book warning about a Canadian housing bust, suggested Canadians could expect to see the value of their homes fall about 15 per cent nationally, and 30 per cent in some hot markets such as Vancouver.

While praising Finance Minister Jim Flaherty for acting, Turner said the minister has also set up the conditions under which some Canadians will try to beat the Oct. 15 deadline.

“This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months,” he said.

“If you’ve been shopping around for a home and you don’t have any money for a down payment, you will want to buy now with zero down and a 40-year mortgage. If you’re a lender, you’ve got three months to load up people with debt regardless of what the debt-service ratio is.”

Ottawa said the changes were a precautionary measure designed to head off a U.S.-style subprime mortgage crisis, not an indication of underlying problems in the Canadian system.

But officials said concerns had been mounting for months as the government tracked the explosion in the issuing of mortgages longer than 25 years, for years the standard in Canada.

The government had been consulting with lenders, insurers and brokers for the past few months over generous mortgage products, said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

“I think they were worried about what was coming out of the U.S. in increases in defaults and foreclosures, and I think they were concerned over their 100 per cent guarantee, wondering, ‘What is our risk here in a calamity?’ ” Murphy said.”

Julian Beltrame, The Canadian Press

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b0710133A&page=2

I think that many folk’s are reading the headlines and forgetting to do a little more research, one of the biggest differences that can be plainly seen from the American counterparts is that the US was using 100 year Amortizations, yes you read that correctly 100 years. In the Vancouver market it is almost impossible for anyone to break into unless they have a substantial source of income, I don’t know of that many young people who have the kind of income to even consider home ownership in the Greater Vancouver Area.

I don’t foresee many being able to buy out there baby boomer parents either, and the parents need to pull the equity out of there homes in order to retire. “Nearly 3 out of 5 middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young www.ey.com has concluded.

The study, set to be released Monday, finds that Americans will have to drastically reduce their standard of living before retirement to live comfortably, or even avoid destitution, later in life. Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more – 37 percent.” http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/07/13/MN9511OD8S.DTL

More Canadians will continue to be increasingly dependent upon their nest egg that has been built by the equity of homeownership, how will the new generation afford to take over the burden of what have become million dollar mortgages?

Just as an example the amount of income required for a 850,000 home with 5% down over a 35 year term would be 185,535 per year, I don’t know of many people under 40 that are legitimately earning that kind of income—even combined income—a great deal of the Vancouver bubble has been created from offshore money and as of right now the amount of offshore influx is still over 50k people from oversees moving here every year!

What do you think, is the younger generation going to be able to sustain these prices??