OTTAWA — Tougher
mortgage lending rules, as unveiled by Finance Minister Jim Flaherty on
Monday, could add an estimated $100 a month in carrying costs for
future homeowners — pricing some people out of the real
estate market — and affect roughly 20,000 home sales in 2011,
analysts say.
Those rough estimates emerged after the government announced changes
that would see Ottawa no longer guarantee insured mortgages with terms
exceeding 30 years (the previous maximum was 35 years).
Also, Mr. Flaherty lowered the maximum amount Canadians can borrow
against the value of their homes, to 85% from 90%, on a refinancing;
and removed federal government backing for home equity lines of credit,
or so-called HELOCs, whose popularity soared in the past decade with
growth double that of mortgage debt.
Combined, the measures “will reinforce what we were expecting
to be a slower pace of real estate activity,” said Adrienne
Warren, senior economist at Bank of Nova Scotia.
She said the impact to the change to amortization would be relatively
modest, at about $100 more per month in carrying costs for an average
home. Nevertheless, “it could price some people out of the
market at the margin, but it suggests [Canadians] will have to take on
smaller debt than they otherwise would.”
Meanwhile, Pascal Gauthier, senior economist at Toronto-Dominion Bank,
said the amortization change could affect 20,000 home sales on an
annualized basis, with the average home price likely to weaken by 2%
this year or slightly more than TD had forecast.
The changes, as reported by the National Post on Sunday, emerged as
worries escalate among Bay Street leaders and the Bank of Canada about
the record levels of household indebtedness, and how conditions could
deteriorate unless pre-emptive action was taken.
“We want to make sure we don’t have the kind of
medium-term problem that has been experienced elsewhere because of this
tendency by some to assume large indebtedness at low interest
rates,” Mr. Flaherty said. “People need to
demonstrate that good Canadian trade of prudence and reasonableness in
terms of their debt assumptions.”
He said the growing appetite for HELOCs was of particular concern and
was an “important” factor in the rise in overall
household debt. Mr. Flaherty said some banks were insuring, through
Canada Mortgage and Housing Corp., their exposure to HELOC liabilities,
and wants to put an end to that practice.
“That’s particularly risky,” Mr. Flaherty
said. “Some of those loans are not used to create housing in
Canada. They are used to buy boats and cars and big-screen TVs.
That’s not the business mortgage insurance was designed
for.”
Executives at Bank of Montreal were quick to applaud the government's
move.
“The actions announced are prudent, measured, responsible and
timely,” said Frank Techar, president of personal and
commercial banking at Bank of Montreal.
The changes will be implemented in stages, with adjustments on
amortization and refinancing limits coming into force on March 18.
Government backing on HELOCs will be removed as of April 18.
The government said exceptions would be allowed after the new measures
come into force when needed to satisfy a home purchase or sale and
financing agreement struck before the March and April in-force dates.
The minimum down payment, at 5%, will remain as is. Mr. Flaherty said
the government could have gone further by boosting the minimum down
payment but opted not to in an effort to strike a balance.
“We do not want to create any shock in the market or any sort
of dramatic pressure. We want to be moderate.”
The changes to the country’s mortgage rules -- the second in
as many years -- emerge amid rising concern about the record levels of
household debt, which measured as a ratio of money owed to disposable
income nears a startling 150% as of the third quarter of last year.
The Bank of Canada recently warned debt levels are growing faster than
income, and the risk posed by consumer indebtedness to the domestic
economy would continue to escalate without a “significant
change” in how consumers borrow and banks lend.
Bank of Canada governor Mark Carney said policymakers have a
“responsibility” to look at the benefits of
pre-emptive action. Joining the chorus have been chief executives at
the big banks, most notably Ed Clark at Toronto-Dominion Bank, in
publicly advocating for tougher mortgage standards.
Last Friday, Prime Minister Stephen Harper acknowledged his government
was considering changes to the rules governing mortgages.
In February of 2010, Mr. Flaherty moved to toughen up the mortgage
rules amid worries that Canada was in the midst of a housing market
bubble. The reforms, since introduced, compelled borrowers to meet
standards for a five-year fixed-rate mortgage, even if the buyer wanted
a shorter-term, variable rate loan; reduced the amount Canadian can
borrow against their home, to 90% of the property value from 95%; and
require purchasers of rental properties to issue a 20% down payment as
opposed to 5%. The moves played a role, observers say, in slowing down
real estate activity.
Analysts at Scotia Capital suggested government regulation was the way
to go in terms of curbing household appetite for credit as opposed to
the Bank of Canada raising interest rates, which they said would be
“imprudent” at this time.
The central bank issues its latest rate statement on Tuesday and it is
expected to hold its benchmark rate at its present 1% level as signs
indicate the economy may be benefiting from renewed business and
consumer confidence in the United States.
Stewart Hall, economist at HSBC Securities Canada, said the
extraordinarily low-rate environment “provides all the
incentive to consumers to borrow and spend and none of the incentive to
save. You can try to [regulate] that away but that is apt to be fraught
with significant frustration.”
Financial Post
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