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4 big changes to Canadian mortgages
In July, a host of regulatory changes governing Canada's mortgage market went into effect, all of which were designed to temper what the government considered was a national housing market in danger of overheating.
After the implosion of the housing bubble and the disastrous deflation of home prices in the United States and other global economies, regulatory agencies everywhere have become more astute stewards of residential lending practices, ready to swoop down like superheroes to make sure everything is right in the world.
However, even in the comic book universe, superheroes are not equally esteemed. The same seems to be true in Canada with its finance ministry. Not all Canadians agree the regulatory changes were needed.
I spoke to the chief executives of two of the major residential brokerage companies in Canada and there seemed to be little concord about the recent moves to slow what could be an impending housing bubble. Ross McCredie, president and CEO of Sotheby's International Realty Canada, gave the Canadian finance ministry a firm thumbs-up, while Phil Soper, president and CEO of Royal LePage, turned thumbs-down on the changes.
The Department of Finance Canada, fearing a potential housing market bubble and rising household debt levels, made a number of market-altering pronouncements: the amortization period for a mortgage loan was reduced to 25 years from 30; maximum refinancing amounts are now 80 percent of loan-to-value; a borrower's gross debt service ratio and total debt service ratio are limited to 39 percent and 44 percent, respectively; and the availability of government-backed insured mortgages are limited to homes with a purchase of price of less than $1 million.
"We like to see stable, healthy markets without major jumps or people leveraging too much debt," McCredie said. "What the ministers are really trying to address, their biggest concern, is Toronto, where there are 130 condo projects under construction right now. About 60 percent of the entire Canadian marketplace in terms of volume of sales is in Toronto."
While Toronto stands out because of its condo boom, it's not an isolated market. All of Canada's other major cities -- Montreal, Calgary and Vancouver -- are enjoying rampant house price inflation.
"We have never seen this before," said McCredie. "To have all markets across Canada as healthy as they are right now is quite unique."
According to Sotheby's own data, sales of Canadian homes over $1 million jumped 29 percent in Toronto during the first half of the year as compared to the first half of 2011, and $1 million-plus sales rose 19 percent in Calgary, 15 percent in Montreal and 11 percent in Vancouver.
What the government is trying to do, McCredie said, "is optically get people to pause and take note of what debt levels are and to not incur more debt than they currently have."
Sounds benign enough, and over at Royal LePage, Soper would agree that Canadian government policy is "usually well-intentioned."
Unfortunately, good intentions are just not enough, and the government's current maneuverings, Soper asserted, "are ill-timed," as they almost always are.
The Canadian government has a tendency to be proactive in regard to mortgages, but almost always too late. The most ill-timed intervention, Soper said, occurred back in 2008 when the finance ministry increased the amortization period from 25 years, where it had been since time immemorial, to 40 years.
"They moved it to 40 years right at the peak of Canadian expansion," he said. "Through the first half of 2008, the Canadian market was still on fire and this stimulus move was like throwing gasoline on a raging fire."
Shortly afterward, the finance ministry began to reverse course, clawing back the amortization period from 40 to 35 years, 35 years to 30 years and now to 25 years along with other market-tightening regulatory changes.
"I supported the last changes, but this new one was ill-timed," Soper said. "This one came at a time when the market was clearly cooling. The number of transactions nationwide was either falling in absolute terms such as in our most expensive market, Vancouver, or the rate of increase has fallen off dramatically."
While prices are still rising in many Canadian cities, Soper said, "The actual rate of increase has been falling monthly since the beginning of the year. More telling, the rate of transaction growth is falling and the listings in play are rising."
Even Sotheby's survey of homes over $1 million reported the listings in the Great Toronto area rose 31 percent from 6,193 homes to 8,105.
"We know from long experience, the first thing that happens when a market cools is fewer people buy homes," Soper said. "The next thing that happens is there are those people who have been sitting on the fence and when they see the market slipping away toss their house onto the market hoping to catch the peak. Inventories are rising."
All the indicators were pointing toward a rapidly cooling market, Soper said. "The government introduced the change to be a clear drag on activity. I call it kicking a guy when he's down. It was unneeded and ill-timed."
McCredie doesn't think so. "Mostly, there is a lot of media talk about the housing bubble in Toronto, and from my perspective it concerns me when you see as many cranes as you see right now," he said. "But, we are dealing with a massive influx of immigrants. 33,000 people immigrated to Canada from Egypt alone. 100,000 people are moving into the city of Toronto. There is a huge demand for housing."
Obviously, Soper doesn't see it that way.
So, I asked him why the finance ministry made the change.
"I think what happened was, it really wanted to get back to 25-year amortization, which is the long-term norm of this country," he said. "They were worried if the market cooled and went into a couple of years of flat or potentially declining unit sales, they would have missed their window. It was labeled an anti-debt move, but, in fact, it was driven by a more fundamental policy change. And it was ill-timed."
Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "Growing Up Levittown: In a Time of Conformity, Controversy and Cultural Crisis," is now available for sale on Amazon.com.
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