Finance Minister Jim Flaherty may intervene in amortization period for home mortgages

Home sales in this region haven’t been this slow in a long time. According to the Real Estate Board of Greater Vancouver, the number of transactions in May, June, and July were all below those for the same months in any of the previous 10 years.

In July, sales were down 18.4 percent from the previous year. In June, sales fell 27.6 percent over the same month in 2011. And in May, the annual drop was 15.5 percent.

In the midst of this slowdown, Finance Minister Jim Flaherty announced the fourth reduction in the amortization period for home mortgages in four years. At one point in the past decade, people could take out a 40-year loan to buy a home. But in 2008, it was ratcheted back to 35 years, and then to 30 years in 2011. In June the federal government brought it down to 25 years.

So is there a connection between the shorter borrowing period and the slowdown in sales? Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association, is keenly interested in knowing the answer to this question.

In a phone interview with the Georgia Straight, Simpson said that Flaherty has assured his national organization, the Canadian Home Builders’ Association, that the government will review what impact the new amortization period is having. “I hope he looks at markets where affordability is already an issue, like Vancouver,” Simpson stated.

He added that during the summer months, home sales traditionally slow down. He’s more concerned if the monthly sales volume falters after the Labour Day weekend, when most people are back at work. That’s when he suggested that Flaherty and the prime minister will have to assess whether to take action.

“If it continues to fall, they’re going to have to take a good hard look at what their actions have caused—and be prepared to make some adjustments,” he said. “I don’t know what those adjustments are.”

Simpson pointed out that the monthly sales figures include new and resale housing. The real threat to the economy, he said, is if a real-estate slowdown leads to a sharp reduction in housing starts. That’s because new-home construction stimulates the sale of appliances, carpets, and other products. “For every housing start, there are 2.8 person years of employment that are created,” Simpson stated. “That’s direct and indirect jobs.”

Comments

23 Comments

jonny .

Aug 8, 2012 at 4:28pm

I think a 30 year amortization is the right number. If they want to do something to make new buyers more safe, require more of a down payment.

Shortening amortization hurts people in the short term, and helps in the long term. Increasing down payment actually helps in the short term, because if the owner runs into trouble, they have more equity they can rely on for a major repair, medical bill, or job loss.

A 10% minimum down payment should not be that hard to come up with. If you cant come up with $40k down to buy a $400k house, you probably couldn't afford that $400k house.

Being financially responsible is not a thing you do on a whim, its a way of living, and big purchases like a home take planning, and saving. So saving for a couple years to buy your first home is not unreasonable. Being able to use your RRSP for your first home is also a great tool for first time buyers.

Most people who complain about the price of property are very bad with their money, and dont plan and dont save. That is why they are perma-renters. Also, many people think they should be able to buy their dream home right off the bat, but thats not realistic. You buy a condo, then a couple years later you upgrade to a townhouse, then you upgrade to a small used home, then you get your dream home. Some people can skip a step or two if they are very good with their money. Only rich people can afford a nice home as their first purchase. This is not new, its always been like this.

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Alby

Aug 8, 2012 at 5:55pm

Jeez.....give it a rest already. Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association....is worth quoting? Guess what...he's concerned about him and his ilk making cash....no matter the risk to the larger economy. You could not have picked a more partisan hack if you tried. What next? Will the Georgia Straight just sell itself to real estate interests?

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Bryn

Aug 8, 2012 at 6:17pm

Shortening the amortization period is about the best thing that could have been done for us debt gorging Canadians.

Seems sometimes people forget that real estate, like everything else is supply and demand. The price of houses will rise to meet the supply of money available. If the financing isn't available, say due to 25 year amortizations versus 30 year, then the price of houses falls to the point where they become 'affordable' again. Otherwise nobody buys it.

Here in Vancouver we've seen the worst case scenario play out over the past decade. Folks have borrowed way too much money with virtually nothing down (in many cases less than nothing down as folks have been allowed to borrow their down payments or get cash-back mortgages). Naturally anyone selling will raise their price as much as possible, and if someone is able to get financing for an absolutely stupid amount of money then that's what they'll charge.

Folks don't really seem to realize just how much more they are going to be paying the bank over a 30-year term versus a 25-year term. A $500,000 mortgage (which buys you basically nothing in Vancouver) at 5% results in about $372,000 paid to the bank on a 25 year term. Yep, more than half of what the place is worth!! But over a 30 year term, you will be paying over $460,000 to the bank! That's insanity - you are literally throwing away $460,000 on interest over that 30 years. And we have the lowest rates ever seen in Canada since the country came to exist right now.

That $460,000 over 30 years comes to nearly $1280/mo. That's practically rent. The $372,000 or so above comes to about $1240/mo only you pay it for 5 less years. And to think people have the nerve to say that folks are "throwing their money away on rent" when they jump in to financing deals like this. Total insanity. Why should TD or RBC get an extra $88,000 from you just so you could "spend a little less per month"? I mean $88,000 - that's almost two years salary at the average wage here in Vancouver.

I don't know anyone I've ever met who can really say that they are actually able to sign up for 30 years of anything. You don't know what your job will be like, you don't know what the economy will be like and you sure don't know what real estate values will be like. Remember back in the 1980s interest rates got to over 20% for mortgages - the LAST thing you want is to have decades of payments left when that sort of thing happens. Compound interest is not your friend.

What we really need to do is slow down and realize that we don't need to get in to hundreds of thousands of dollars worth of debt just to "keep up with the Joneses". Stop throwing your money away on interest payments and start thinking like our grandparents did.

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TonyVan

Aug 8, 2012 at 8:42pm

Couple/few months after bringing it down to 25 they're going to put it back up? Don't think so. Plus sales were slowing big time before the move to 25.

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downwithu

Aug 8, 2012 at 9:09pm

Johnny, Your last paragraph "Most people who complain about the price of property are very bad with their money, and dont plan and dont save. That is why they are perma-renters."

Is offensive to the struggling class especially trying to make their ends meet. How dare you insinuate that people don't plan and don't save.

Not everybody has the luxury of a rich family to provide them with a new house, car, and Prada Bag with a Chihuahua hanging out of it.

There are circumstances that affect people lives and you have no right to pass judgement on the struggling class.

So, go crawl back into your glass house and shaddup.

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Huh?

Aug 8, 2012 at 11:23pm

Flatherly's attempt to cool the market has indeed cooled the market. And, now, Simpson is complaining that Flatherly may have inadvertently cooled the market?

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Save Vancouver

Aug 9, 2012 at 12:07am

Smart move on Flaherty's part, now they just need to lower the boom on foreign investors buying up property with no intention of living in it.

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pascal frederique

Aug 9, 2012 at 1:01am

No those change as to stay, to stop a biger crash. 25 years amotisation and now flaherty should bring back the 10 % cash down minimum to have a morgage.

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Jonathan

Aug 9, 2012 at 9:18am

For the love of god, Charlie Smith, who claims to have no vested interest in the matter, stop writing these unconscionable editorials in blind defense of the status quo! Georgia Straight, this is your death-knell, your credibility is melting away; if you want to write about the inevitable bursting of the bubble, as I imagine you will as that's what everyone's going to want to read about as the sky falls around them, you *must* put a real reporter on the case. Charlie Smith's reactionary opining is beyond shallow and hardly does this matter, which is essential to the near and far future of the city, any semblance of justice.

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Jonnie

Aug 9, 2012 at 9:50am

Where else you going to live on The MAINLAND of Western Canada if you want to be by the ocean?...Greater Vancouver. In Eastern Canada you hundreds of miles of Coastline and those properties are expensive. It doesn't take a genius to figure out why demand in Vancouver is so high. Even in New West walking along the Fraser is Beautiful...It's the sense of openness people like..especially if you come from a crowded place like China or India.

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