Wednesday, July 09, 2008

Government of Canada Moves to Protect, Strengthen Canadian Housing Market

Big news - this is going to put another nail in the coffin of the Vancouver Real Estate Market and it is exactly the kind of catalyst I thought the market needed to push us over the edge. See the Press Release:

The Government of Canada today announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian housing market. The new measures include:

  • Fixing the maximum amortization period for new government-backed mortgages to 35 years;
  • Requiring a minimum down payment of five per cent for new government-backed mortgages;
  • Establishing a consistent minimum credit score requirement; and
  • Introducing new loan documentation standards.
Today’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.

The new limits are planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Certain exceptions would also be permitted after October 15. The Government will work closely with all stakeholders to ensure timely and effective implementation of these measures.

As these measures relate only to new, government-backed insured mortgages, Canadians who already hold mortgages will not be affected by this announcement.

The measures announced today will build on the strength of Canada’s housing market. According to the
International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.

Mortgage arrears—overdue mortgage payments—have also remained low. In recent years, the percentage of mortgages in arrears for three months or more continues to be at low levels not seen since 1990.


Make It Fit said...

The recent spike in mortgate rates did not seem to produce more sales from existing pre-approvals in June.

It would be interesting if new government regulations create any significant pick up in mortgage applications and RE sales before the deadline.

The FIRE industry is trying to pump and sqeeze the last drops of economic rent from serfs.

mohican said...

These new regulations represent a very significant shift in lending requirements. The biggest impact will be felt in the most expensive markets - Vancouver - because the affordability has been stretched so far that 0% down and 40 year amortization has become the new normal for the first time buyer in the Vancouver area. As we all know, the first time buyer is the buyer that matters because without them the market dries up.

Make It Fit said...

Very true, mohican. But these regulations are still a joke: 5% downpayment for 35 years is pretty loose. The investors in Canadian MBS must be turning away from 40 year 0% down investment vehicles. :)

There will be very little credit available near bottom. Until then, it is all pump and dump action.

johnnyrent said...

The real dealbreaker here is not 5%down versus next to nothing, nor the 35 versus 40 year ammortization.

The real dealbreaker is the 45% of gross income threshold in a market where 70% or more of median income is required to buy a median priced home.

I think the pool of FTB greater fools just got a whole lot shallower.

joycer said...

Wow, what about this:
"Finally, it will set a maximum of 45 per cent on a borrower’s debt-service ratio – the proportion of gross income that is spent on debt service and housing-related fixed or essential payments."

In Vancouver we're spending way more than 45% of income to buy housing. Anyone care to make predictions about how far down the average housing price will have to come for the average family ($70,000 annual income) to qualify for a mortgage now?

mohican said...

Yes, the combination of the stricter requirements on credit scores, GDS ratio, amortization, and down payment requirements all work together to decrease the pool of potential first time buyers - if there are any left.

Each of those aspects removes thousands of potential real estate purchasers from the market.

roger said...


I think the ship is really starting to list!!

Make It Fit said...

I also like this little tid-bit at the end of the announcement:

Mortgage arrears—overdue mortgage payments—have also remained low. In recent years, the percentage of mortgages in arrears for three months or more continues to be at low levels not seen since 1990.

There is room for mortgage arrears to rise. It does not get better than this. :)

RentingSucks said...

It's ironic because I think the introduction of these products at exactly the wrong time 2 years ago extended the bubble. Now they are scaling them back slightly at exactly the wrong time supposedly to stop a US style housing bubble. Better not to have changed them in the first place I think.

Monthly dollarwise though I think the 45 percent Gross Debt Service Ration (GDSR) where you can actually spend the full 45 percent of your gross income on a mortgage (assuming good credit and no other debt) is the most significant change. Previously the mortgage portion of this amount was restricted to 32 percent. If your making 60000 that's $650 dollars more a month you're allowed to spend. About $100,000 more mortgage.

jesse said...

We knew this was coming based upon the hints from the Ministry of Finance and the BOC Governor. I'm surprised it's being done so quickly. The abstract assertion of "[e]stablishing a consistent minimum credit score requirement" requires further analysis because it can have a massive effect depending upon where the bar is set.

All this will do is speed up the fall. The end destination is not in question unless the government keeps throwing money into the CMHC bottomless pit, which they obviously aren't going to do. +1

tulip-Mania2 said...

35YR, 5% Down is Canada's version of the American Subprime Lite.

Tick Tock, Tick Tock

Deliverator said...

Thoughts of horses and barn doors come to mind...

macho slob said...

Have to agree with rentingsucks...WTF were they thinking 2 years ago? They obviously did'nt give a damn about Vancouver, which Schiller called the bubbliest city in the world at about that time.

This will only grease the market slide, along with an unprecedented situation of rising rates desdpite a deepening recession that is global in scope, and could easily exceed the darkest days of 82.

Unfortunately the FED has already blown it's wad, and will be unable to print it's way out of this one.

If that's not scary enough, there is not even a glimmer in sight of any kind of bottom in the US housing market.

patriotz said...

In Vancouver we're spending way more than 45% of income to buy housing

No we're not, because the median income household is not buying the median price house with no down payment.

Median income households are buying crapola condos as new purchases and people are buying median houses with proceeds from selling their existing properties or other sources.

But this is a house of cards that will collapse once the weakest card (condos) falls and one-off transfers (Mom and Dad) are exhausted.

pricedoutfornow said...

The party's over. My landlord called today, panicking because the neighbour has dropped her asking price by $20k or so. (two open houses in a row, no bites). He wants out of our one year lease so he can sell, he offered to sell it to me (ya right). Rush to the exits, don't get trampled!!! Renting from amateurs sure sucks at times...

vancouver refugee said...

anyone know, or know where to get, the number of 40 year mortgages or the percentage compared to more conventional 20/25 year since their inception? personally cannot see this change make much of a difference but do see the 5pct downpayment as helping the slide. side note, who is the canadian equivalent to countrywide?

patriotz said...

"Faced with eroding affordability, at least half of Canadians now buying homes for the first time have decided to extend their loans up to 40 years, according to a new study."

Note "half of Canadians". I'm sure Vancouver is higher.


joycer said...

Vancouver Refugee,
According to Garth Turner:
"The only stat I know is valid is that 40-years now account for 45% of all new originations. Astonishing after two years. — Garth"

They are very significant in the current bubble, I'd imagine that in BC and Alberta, the share is even higher due to our affordability issues.

airborne dog said...

The Canadian equivalent of Countrywide is Home Capital (HCG). It trades on the TSX and it can be shorted, just like Countrywide could have been.

scoop said...

The abstract assertion of "[e]stablishing a consistent minimum credit score requirement" requires further analysis because it can have a massive effect depending upon where the bar is set.

You have to click through to the backgrounder for the details. The minimum score will be 620. Also 45% TDSR requirement, new loan doc standards, no more interest-only loans... Not that we had a problem with any of that stuff of course.

Deliverator said...

Dog, it looks like HCG is already in the process of being shorted.

airborne dog said...

Quite a bit of that is mine which I shorted at $39. I will wait until it drops to $0 or close to that. It is a slow process but I have patience. The dividends I have to pay in the meantime are rather insignificant.

roger said...

Those who have already bought (or about to buy) with zero down and 40 year amortization will soon be questioning their decision. Here are the facts associated with purchasing a modest 450K house in the burbs under these conditions:

CMHC insurance is 3.7% or 16.7K
Property transfer tax 7.0K.
Legal fees 1K
Building inspection .3 K

Total purchase price is 475K and a mortgage of 466.7K on a property with a market value of 450K. The monthly mortgage payments @5.5% fixed, 40 year amortization are 2.4K. Add in property taxes and the PIT is 2.7K per month.

The day they buy the property they are "upside-down" on their home purchase with a mortgage that exceeds the current market value. They might have to sell for a myriad of reasons (marital problems, job loss, ill health etc). If they sold for 450K with an agent using typical commissions they would net 433K for a total loss of 42K and a payment to the bank of 33K less the small amount of principal already paid.

What if the house market value drops by 10% over the next year? Selling would result in a loss of 87K and a payment to the bank of 72K. If they keep the house they keep paying that PIT of 2.7K per month. Talk about being between a rock and a hard place.

Alan said...

Correct me if I'm wrong, but the 45% total debt to gross income ratio is actually an increase from current practice, no? Is not the current limit 40%?

Alan said...

OK, checked on the CMHC web site. For a standard mortgage, current maximum debt-service ratios range from 40-44%, depending on the credit rating.