13 Feb

Changes to Canada’s mortgage rules since the 2008 financial crisis

Financial

Posted by: Garth Chapman

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

July, 2008:
• After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010
• Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
• The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:
• The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
• The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012
• A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
• A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
• Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
• Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
• Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015
• The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
• The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016
• Borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate). This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
• Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more. Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018
• Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase. REFINANCING an existing property (20%+ Equity) will also be subject to the stress test. For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher. Estimated reduction in borrowing for the average borrower, 15-20%
• OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
• Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.

13 Jul

A MORE ACCURATE MEASURE OF HOUSING MARKET VALUES

Real Estate Market

Posted by: Garth Chapman

Do you want to know what the true year-over-year price changes are city by city in Canada?  The Teranet National Bank National Composite House Price Index is not distorted by our ever-larger and more luxurious houses and condos. Teranet tracks same-house sales by market across Canada that is easy to drill down into the data to see what is the true value change for same-property sales…  http://www.housepriceindex.ca/

11 Jul

Housing Affordability in Alberta is better than you might think

General

Posted by: Garth Chapman

Housing affordability in Alberta’s cities is better than it has been since the 1980’s in most areas. In measuring housing affordability there are 3 major components: Incomes, Housing Prices, and Mortgage Interest Rates.  So let’s briefly look at those 3 key factors.  Alberta incomes, though down, are still leading the nation.  Housing Prices are down marginally, and mortgage interest rates are as low as they have ever been.  And that make this an excellent time for buyers.

The Canadian Centre for Economic Analysis (CCEA) published a report on Shelter Affordability Across Canada’s Provinces which measures the proportion of income that households devote to their shelter-related needs (including transportation, utilities, and maintenance).

A sub-set of that report, CCEA’s bulletin of April 29, 2016 shows that Alberta and Newfoundland are the only provinces in Canada that feature a Shelter Consumption Affordability Ratio (SCAR ratio) of 35% or less, implying that shelter affordability is relatively less of a problem on average in these provinces than in the rest of Canada.

On the same subject, RBC Economics Research publishes a quarterly report looking at home ownership affordability in Canada entitled Housing Trends and Affordability.  The report attempts to balance out differences in incomes and in housing process by province and by city in order to show the ‘relative’ affordability from region to region.

Unfortunately the report does not also take into account different taxation levels, which would make the report much more accurate.  Having said that, it is an excellent review of housing costs around the country, and shows us that sometimes the lowest price is not actually the lowest cost for families when the regional variance in incomes is accounted for.

In descending order, here are Q1 2016 ratios for the 6 major cities, showing the percentage of average pre-tax income required for housing costs (mortgage payments, utilities and property taxes):

  • Vancouver 87.6% aggregate.  Single family homes 119.5%.
  • Toronto 60.6% aggregate.  Single family homes 71.7%.
  • Montreal 42.9% aggregate.  Single family homes 42.4% (as SF homes in Montreal are less expensive than multi-family).
  • Calgary 35.1% aggregate. Single family homes 37.9%.
  • Ottawa 33.0% aggregate.  Single family homes 36.8%.
  • Edmonton 31.2% aggregate.  Single family homes 33.5%.
19 Jul

The Good Old Days, when homes were cheap, or were they?

Financial

Posted by: Garth Chapman

Ahhh, the good old days.

Or were they, economically speaking? Let’s take the early 1980’s as an example.

We bought a home in early 1981 near the bottom of the housing crash caused by PE Trudeau’s NEP (National Energy Policy), which dropped that home’s value by about 20% from $111,000 to the $91,000 that we paid.

Oh, and we sold that home 5 years later in 1986 for a $4,500 loss at $86,500. Our thinking was that we were at the bottom and it was time to buy a more expensive home as it would appreciate more as the economy improved. That turned out very well, but that’s another story…

My income as a 27 year-old in a middle management job then was $42,000. Interest rate was around 18%, but our provincial government bought the rate down to 12%.

At 10% down the mortgage was $83,640 with a monthly payment of $863. In 1981.

That same house is now easily $450,000. So at the same 10% down the mortgage would be $414,720 and at an easily obtainable fixed rate of 2.69% the monthly payment would be $1,897. Income for same job now would be about $120,000.

So income is up nearly 300%.
Home price is up nearly 500%.
Down-payment is up from 2.2% to 3.8% of annual income.
Mortgage payment is DOWN from 25% to 19% of monthly income.

So the down payment is a tougher burden, but the monthly cost of the mortgage is way-way down. Hence we live in bigger fancier homes and/or drive nicer cars, have 3 TVs, take more vacations, etc, etc.

Ahhh, the good new days.