Canadian bankers plot new mortgage rules on down payments and amortization periods
For some who make their livelihood in the real-estate industry, the lead story in the February 6 Globe and Mail came as a shock. The paper cited a senior banker, speaking on condition of anonymity, saying the heads of the country’s six largest banks held a private meeting with Bank of Canada governor Mark Carney last November to discuss two major housing issues.
According to the article, the bankers told Carney that they wanted the federal government to raise minimum down payments from five to 10 percent of the purchase price and shorten the maximum amortization period from 35 to 30 years. The article conveyed the impression that the bankers wanted a “preemptive” action to forestall any possibility of a U.S.–style housing collapse that could jeopardize the solvency of lending institutions.
Joe Santos, president of the Mortgage Brokers Association of B.C., told the Georgia Straight by phone that if Finance Minister Jim Flaherty were to legislate these changes, it would harm the Canadian economy.
“We feel that the market, although very active in Vancouver, is pretty stable across the nation,” Santos said. “The potential reduction of amortizations to 30 years and increasing down payments to 10 percent would have a very negative impact on the housing market because it would really eliminate a number of first-time buyers from being able to get in.”
He noted that people were motivated to buy last year because interest rates were low and property values had dropped during the recession. “We think a lot of people were motivated to jump in and purchase properties for those two reasons,” Santos said. “Now property values have gone back up. Interest rates are low, but they’re anticipated to go up also. So we think the market is going to be self-correcting.”
Santos’s concerns were echoed by New Westminster chartered accountant Elbert Paul. He told the Straight by phone that he thinks it’s a terrible idea to increase minimum down payments because it will prevent many first-time buyers from entering the housing market. “It’s a very demanding environment for the next generation,” he said.
Last week, the Straight quoted Paul’s concerns about a draft advisory from the federal Office of the Superintendent of Financial Institutions Canada issued last October. The document highlights the need for banks and other federally regulated entities to convert to international financial reporting standards for the measurement of balance-sheet assets. But there is no call in the paper to adjust regulatory limits for financial institutions.
Paul wonders if the bankers’ call to reduce the amortization period and increase minimum down payments is connected to this advisory. The advisory stated that banks were required to begin reporting Canada Mortgage and Housing Corporation–insured securitized mortgages (mortgages packaged into investment products) on their balance sheets on January 1.
In a December 10 letter to Finance Minister Flaherty, Paul stated that because banks don’t make as much money on these securitized mortgages as they do on other financial products, they will be less willing to include them in their asset portfolio now that they are being recorded the same way as other investment vehicles. “It’s not necessarily the Canadian public’s financial interest that they’re concerned about so much as just increasing the profitability of the lines that they’re doing business in,” Paul told the Straight.
Meanwhile, UBC Sauder School of Business real-estate expert Tsur Somerville told the Straight by phone that minimum 10-percent down payments will put downward pressure on housing prices, particularly in expensive markets such as Vancouver. He suggested this is particularly true in the condo market, which attracts more first-time buyers. “The banks want to do this because they’re afraid of the spillover from any sort of housing-market bust into their other lines of business,” Somerville said. “It just works a lot better for them if the government just slaps everything down for them, because then they’re not the bad guys,” he said.
The Canadian Bankers Association declined the Straight’s request for an interview.