CMHC Implements New Mortgage Rules

The newly elected Liberal federal government is wasting any time attempting to remedy what many fear is a nationwide housing market bubble. It’s been a noteworthy week and a half in the ongoing story that is the Canadian real estate market in 2015. As Adam Chambers of The Globe and Mail notes, first, the Bank of Canada announced that it would consider moving to negative interest rates should the economic conditions warrant the need to do so. And second, the Department of Finance, the Canada Mortgage and Housing Corp. (CMHC) and the Office of the Superintendent of Financial Institutions (OSFI) came to a consensus regarding measures geared at slowing down the market. The resulting measure will increase the minimum down payment for new insured mortgages over $500,000 to 10% from 5%, as well as future changes to be made to the amount of capital that banks must hold against residential mortgages.

The logic behind the rule change is sound, in theory. The rules are structured so minimum down payments begin to rise gradually as the selling price moves above that point. But, as is the case when putting any codified policy into practice, the only way to know whether or not its working is to give it time, followed by an evaluation of its effects.

Don Pittis of CBC breaks down what the possible consequences the increase to down payments might have, breaking it down into two scenarios:

“Is it too much? Enough to pop the bubble that so many people have identified? Or, at the other end of the spectrum, will it be too little to have any serious impact on a mortgage market that is constantly finding fresh ways to entice new buyers?”

Pittis goes on to make an interesting observation, noting that the new rules instituted by Bill Morneau, atleast at first glance, appears to target the richer segment of the market, seeing as how homes that are under $500,000 will remain unaffected by the change. The effects of the new rules are likely to be restricted to the margins. Since the rules apply across Canada, cities such as Calgary, with traditionally lower minimum down payments, will have to bare the brunt of the changes.

But, when one factors the record breaking increase in housing prices in Canada’s two largest markets, Toronto, and Vancouver, you quickly realize that $500,000 doesn’t exactly constitute “rich” anymore. The majority of first time homebuyers in Toronto, if they opt not to purchase a condo, are looking at a home priced anywhere between $500,000 and $1M. Craig Alexander, an economist for the C.D. Howe Institute, a Canadian economic think-tank, commented on the state of first time homebuyers, arguing that many have to overextend their budgets and income in order to purchase a home, which forces them into a precarious financial situation that can become disastrous very quickly.

“The share of households that have no financial buffer has been going up. There’s more financial vulnerability now than there was before.”

Jason Quintal | December 19, 2015

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