On February 16, the Conservative government announced three new measures to make it more difficult for some Canadians to finance home purchases. Finance Minister Jim Flaherty’s news release dealt exclusively with mortgages insured by Canada Mortgage and Housing Corporation, which is a federal Crown corporation.
Just a week earlier, the Fraser Institute, a Vancouver-based right-wing think tank, released a report calling for the privatization of CMHC’s mortgage-insurance business and withdrawing government guarantees from all mortgage insurers. Several directors of the Fraser Institute work in the financial-services sector, which could pick up a part of this business should the federal government retreat from this area.
Make no mistake—this is big business. CMHC vice president Pierre Serré told Canadianmortgagetrends.com late last year that the Crown corporation has $480 billion in insured mortgages. CMHC “securitizes” these mortgages, bundling them into financial products and selling them to banks, insurance companies, and other investors.
Earlier this month, an unnamed senior banker told the Globe and Mail that his industry wanted Ottawa to increase minimum down payments for homes from five percent to 10 percent. In addition, the industry wanted the federal government to reduce the maximum amortization from 35 to 30 years. With a shorter amortization, homeowners would have to make larger monthly payments. These moves would have curbed the overall amount of borrowing for homes, thereby having a negative impact on CMHC’s securitization business.
Flaherty didn’t go that far. Instead, he stated that all borrowers must be able to qualify for a five-year fixed-rate mortgage even if they choose a cheaper mortgage at a variable rate over a shorter term. He also reduced the maximum withdrawal amount from 95 percent to 90 percent in home refinancings. The third measure will force investors to put 20 percent down to qualify for CMHC-insured mortgages on homes that they won’t occupy.
“Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” Flaherty stated in the news release.
This came the day before the Canadian Real Estate Association reported that seasonally adjusted housing sales fell 2.8 percent across Canada in January over the near record high of the previous month. The CREA stated that the average residential price in January was up 19.6 percent over January 2009.
Vancouver real-estate marketer Cameron McNeill told the Georgia Straight that Flaherty’s decision to force buyers to qualify for five-year fixed-rate mortgages is like a “short-term Band-Aid”, which could make it more difficult for some first-time purchasers to enter the market. He added that they’re not responsible for the “frothy, hot market”, which the federal government wants to restrain from getting overheated. “The speculative buyers—the ones that I think they’re trying to slow down—they’re putting down more than 10 percent,” he said, noting that developers who presell condominiums usually require down payments of at least this amount.
Canadianmortgagetrends.com praised forcing buyers to qualify for a five-year, fixed-rate mortgage, but added that it wouldn’t make a big difference for those qualifying for variable-rate mortgages. However, it slammed the requirement for 20-percent down payments on speculative housing purchases, saying Ottawa could have adopted different measures, such as changing the rules for net worth or limiting the number of insured mortgages per person. “Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada,” the site stated. “Will it cause a material rise in rents? That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.”
Maurice Levi, a finance professor in UBC’s Sauder School of Business, told the Straight by phone that the government wants to slow the housing market, which normally it would do by allowing interest rates to rise. “But that will slow down the rest of the economy,” he said. “They had to be pretty ingenious to come up with a way that makes it more restrictive for capital for the housing market without overdoing it for all the other sectors of the economy that are still pretty weak. I think they’ve done a pretty decent job.”