The impact of the new mortgage rules in Canada

Garth Turner at his blog the Greaterfool.ca spends some time looking at the impact of the recent decision by the harper government to change the mortgage rules in Canada. The impact of this is going to impact all of us who own property or want to own property. The full post is here but the excerpt below should give us all pause to think, emphasis mine.


...The US media has been peppered with stories about an inevitable dump in Canuckistan real estate values now for a couple of months (this apparently seems obvious to everyone but Canadians). But with Ottawa’s deliberate deflation of housing just days ago, fear’s in the air.


No wonder. As the F-and-OSFI tag-team hits are better understood, consequences become clearer.


There are more than a quarter million first-time home buyers a year in Canada (new and resale), and at least half of them will be affected by killing off the 30-year amortization, eliminating the cash-back mortgage or jacking up borrower qualifications. A big reason house prices have advanced and unsustainable markets held has been all the virgins pouring in with their hormones and 100% financing. Underestimating the impact of these changes on them, or the market, would be a big mistake.


As the mortgage broker bible (Canadian Mortgage Trends) pointed out, dropping the amortization alone means a buyer with no debt and a $75,000 income will qualify for almost $50,000 less in financing. So he doesn’t buy, or prices go down $50,000. Either way, big outcome.


Ditto for the new debt-ratio rules. Last week some people thought they were being made more generous, but the opposite is true. The gross debt service ratio (GDS) is falling from 44% to 39%, which means a buyer earning $75,000 not only can afford less mortgage, but might also qualify for a significantly lower amount – 12%, or $57,000, less. More downward pressure on house prices.


The new million-dollar rule for CHMC insurance might be politically sexy, but it’s also a game-changer in places like Vancouver, Richmond, Unionville and hunks of 416. In the GTA and the Lower Mainland million-plus listings now amount to almost 20% of the entire market. As I mentioned last week, over 2,500 houses in Van and 5,000 across the region are priced here. Soon buyers will need at least $250,000 in cash to close these deals, which means more $999,900 homes.


And those HELOC changes are a big deal. Today you can borrow 85% of your home equity, but soon it will be just 65% (or 80% if you layer an amortized mortgage on top of a line of credit). The inevitable result will be crickets in Home Depot. But how can civilized life go on without upgrades to 14-burner gas ranges and squirting toilets?


By the way, the mortgage industry is freaking. The professional association issued a statement saying, “these changes, together with new OSFI underwriting guidelines…may precipitate the housing market downturn the government so desperately wants to avoid.”


But the fact is, F and Mark Carney now want real estate to deflate. They desire lower prices, even knowing thousands of recent buyers will be thrust under water, economic growth will be impacted, employment whacked and downtown condo towers turned into monuments to speculator stupidity and losses. As houses lose value, families will shed equity – everywhere. The wealth effect will be gone, and consumer spending impacted. Lower retail sales, fewer Best Buys and more Wal-Marts.


It underscores the seriousness of the choice: wait for a US-style, bank-kicking housing wreck, or create a Canadian-style controlled melt.