Written by VERICO Economist Michael Campbell:
The Ghost of the Sub Prime Mortgage Crisis Haunts the Finance Minister
By now you will have seen the details of the significant changes to the mortgage market announced by the Finance Minister but how will they impact the market?
In a nutshell – it will be big. The changes fundamentally impact the demand side of the supply/demand relationship. Over that past 7 years, market demand at the entry and mid-level have been fueled by record low-interest rates. The new regulations are the equivalent of a significant increase in rates.
By forcing all insured borrowers to qualify based on the posted rate of 4.64% instead of the actual negotiated rate, the changes are the equivalent of a jump of 2% in mortgage rates. Time will tell how many people, especially first-time buyers and other low equity buyers will be forced out of the market with most estimates centering around 1 in 5 but a much higher percentage may see their mortgage limit drop.
In major centers like Vancouver, Calgary, and Edmonton, the timing couldn’t be worse. Following a dismal August, Vancouver’s September numbers are just as bad with single detached home sales plunging 72% compared to September, 2015. Calgary and Edmonton have been slow for far longer. While many rural communities never experienced anything approaching Vancouver-like gains over the last 5 years, they’re all subject to the rule changes.
Given that Vancouver’s city government is going forward with their new vacancy tax and the provincial government has the foreign buyers tax as well as tax changes for foreign buyers in the new regulations, you’d be forgiven for thinking government won’t rest until they do for real estate what they’ve done for the energy industry.
Two Surprises
It’s amazing that the changes come amid an outcry over affordability and will put home ownership farther out of reach for many first time buyers, especially in cities like Vancouver and Toronto.
Secondly, the changes come on the heels of a slew of downward revisions to Canada’s economic growth. The latest came today from International Monetary Fund, which now pegs Canada’s growth at 1.2% this year and 1.9% next year. The latest changes will put further downward pressure on the economy given that real estate is the most important industry in 7 out of 10 provinces.
The Bright Spot
The one short-term bright spot is that people with an existing mortgage agreement and those who get a deal done prior to the October 17th start date are not subject to the new regulations but have to have the mortgage funded by March 1, 2017. That could result in a buying surge for those scrambling to avoid the new rules.
In Conclusion
Clearly the Finance Minister is worried about all the mortgage insurance risk for CMHC and exposure for the banks. Fair enough but at what cost? Right now it looks like reduced activity, erosion of existing homeowner’s equity, hurting many first time buyers and reeking havoc for non-bank lenders.