New mortgage rules pile onto HST

When Finance Minister Jim Flaherty recently brought in changes to Canada’s mortgage rules, Warren Cooney gave the new requirements a bit of a shoulder shrug.

“The simple answer is no,” said the 45 year-old Toronto insurance executive when asked whether the government’s increased financing requirements would affect his decision to purchase a new home.

Similarly, for many buyers, the federal government’s adjustment to its existing regulations governing home acquisitions has generated some head scratching but no real alarm among Canadians.

“At this point, there has not been any mass panic. Reaction from clients has been one of seeking information more than anything,” said Todd Fralic, president of Calgary-based Quantus Mortgage Investment Corp. and head of the Alberta Mortgage Brokers Association.

Merely because potential purchasers might not feel an obvious pinch from the new rules, however, does not mean agents will avoid negative fallout from Flaherty’s changes.

“Yes it worries me,” said Kyle Healey, a Royal Lepage real estate agent working in Toronto’s east end.

With more clients asking advisors to help them shop mortgages, and with advisors placing increased emphasis on housing costs and other aspects of client debt load as part of the financial planning process, the idea of higher outlays to get into a home should be of concern.

Further, the more stringent borrowing requirements are looked at by some as a way to get Canadians used to the idea of austerity, prior to the dropping of what many are predicting will be a belt-tightening budget.

Looming problems Here is what has Healey concerned.

For months, economists and government officials have wondered whether prices in Canada’s real estate market were rising too quickly.

The Canadian Real Estate Association calculated the average selling price for a residence nationally at $328,537 in January 2010.

That represented an increase of 20% gain in 2009.

Compare Canada’s soaring market with south of the border. In the U.S., new home prices slipped 3.6% in the same year, according to the National Association of Home Builders.

Budget 2010 Homepage • Budget opts for austerity plan • Tax tinkering and closing loopholes • Prudent budget misses growth opportunities • For retirees, the cupboard is bare • Budget leaves families perplexed • Budget a mixed bag for the wealthy • New mortgage rules pile onto HST

Housing bubble Flaherty worried that Canada’s strong housing gain, despite a relatively tepid economic recovery, was replicating the U.S. experience of 2008.

Two years ago, aggressive U.S. mortgage schemes placed financially fragile buyers in the position where they could not cover rising house payments in an economic downturn.

The result was a large number of residential defaults, and a deepening and prolonging of that country’s recession. The Conservatives want to ensure Canada doesn’t follow a similar path.

New mortgage game So, in February, Flaherty brought in a trio of changes to the existing mortgage rules.

Now Ottawa:

• Will require all borrowers meet the standards for a five-year fixed rate mortgage, even if they are seeking a lower rate and shorter term; • Will place a ceiling of 90% on the amount Canadians can withdraw from their home, down from the current 95%; and • Will require a 20% down payment for mortgages for non-owner-occupied properties.

For brokers, the changes themselves do not appear particular onerous.

“The majority of lenders are already using internal policies that are quite similar to what Ottawa is mandating,” said Quantus’ Fralic.

Indeed, many lenders had already set the more stringent five-year requirements as the litmus test for new buyers, said Jeff Atlin, a broker with Abacus Mortgage Inc., a mortgage firm located north of Toronto.

As well, financial institutions were in many cases asking for 20% for buyers interested in an investment property, he noted.

Besides, many parts of Canada never really experienced the housing price inflation seen in larger cities, such as Toronto and Vancouver.

“Tell someone in Windsor that his or her house prices are too high,” said Atlin, who doubles as the president of the Independent Mortgage Brokers Association of Ontario. (The average price for a resale home in Windsor fell by 3.8% in 2009 versus 2008, according to the Canada Housing and Mortgage Corp.)

Essentially, Flaherty’s was aimed at reassuring international lending markets that Canada’s economy was in better shape than the United States’ by showing that Ottawa was willing to dampen activity in the real estate sector, experts said.

“As much as anything, the changes were to show international markets that (the government) was doing something,” Atlin said.

On the ground For his part, Toronto’s Kyle Healey said the new rules made some sense.

“The house down the street (from one of his Toronto listings) sold for $631,000, 119% of asking. It’s crazy what is going on,” he said.

The fear among brokers, however, is that Flaherty’s changes are another detrimental trend in an already cooling housing market.

Home prices in January 2010 were 15% higher from record low levels in January one year earlier.

That gain, however, represented a slowing considering that national home prices rose 20% throughout all of 2009, according to the Canadian Real Estate Association.

In addition, sales activity dropped 3% in January versus December, CREA noted. And, the Bank of Canada recently indicated interest rate hikes, not borrowing cost decreases, were likely in the near future.

A higher cost environment won’t sit well with buyers when both Ontario and British Columbia introduce a harmonized sale tax later this year. Taken together, the two policies are bound to push up housing costs.

Add in Flaherty’s new rules “and the perception of the average person on the street might be that there are more problems in buying a house than before,” said Abacus’ Atlin.

Right now, some potential house buyers are advancing their purchase timetables in order to acquire new residences before the sales tax changes, and prior to the implementation of the new mortgage rules on April 17.

Unfortunately, however, bad headlines generated by Canada’s shifting economic and regulatory environment might make more buyers nervous about Canada’s real estate markets, sector watchers said.

With these restrictions out of the gate, the government could always tighten borrowing restrictions even further, they noted.

“There was a possibility the government was going to mandate 10% down for purchases . . . which we feel would have eliminated some very good qualified buyers from owning a home,” Fralic said.

And that might result in more potential purchasers not merely shrugging their shoulders about Ottawa’s new mortgage rules but raising their eyebrows to the whole notion of buying a new house.

Phil DeMont is a Toronto-based financial writer.

(03/04/10)