A new report indicates that new mortgage rules instituted by the federal government have the potential to create a detrimental effect on the housing market and national economy, even as Canadians show prudence in fast-tracking their mortgage payments.
The federal government made the changes in July after Statistics Canada identified Canadian household debt was rising.
Although mortgages are a significant portion of household debt, the most recent survey report from the Canadian Association of Accredited Mortgage Professionals (CAAMP) entitled Annual State of the Residential Mortgage Market in Canada, found that such debt isn’t a problem for Canadian homeowners.
In fact, interviews this fall with more than 2,000 Canadians indicate that those holding mortgages are comfortable with their debt.
“Housing played a major role in the recovery from the recession of 2008-09: housing construction, resale market activity, and mortgage lending have contributed directly to job creation. Even more importantly, rising housing values have supported consumer confidence and consumer spending, and thereby led to job creation,” wrote Will Dunning, CAAMP’s chief economist and author of the report.
“Until recently, housing markets had been stable in most areas of Canada, with resale market activity at healthy (but not exceptional) levels and prices stable or rising at moderate rates. But since July, there has been a sharp downturn in activity, which coincided with a tightening of criteria for federally-backed mortgage loan insurance.”
The rate of house sales is now 7.8 per cent lower than prior to the mortgage changes.
“The housing resale numbers behave like a canary in the mine for us,” said Dunning. “Since the government tightened mortgage accessibility for the fourth time this past July, we’ve seen a drop in resale activity that I think foreshadows an overall decline in the housing market.
“My concern is that a policy-induced housing market downturn creates unnecessary risk that directly affects not just housing but job creation and the economy as a whole.”
In a February 2012 report, CAAMP concluded that during 2006 and 2011, 18 per cent of job creation occurred in Canada as a result of housing and mortgage activity.
Dunning said the key driver of housing demand is job creation, which gives people the confidence and ability to make housing choices.
When employment rises, the consequences are seen gradually in the housing market, since people take their time when buying a home, added Dunning. But when employment weakens, potential buyers can withdraw rapidly from the market as was the case in 2008, which witnessed an abrupt drop in housing activity.
The recent survey found that one-third of borrowers made additional payments or accelerated payments on their mortgages, 87 per cent of homeowners have at least 25 per cent equity in their homes, and 61 per cent of people who renewed in the past year saw a reduction in their interest rates.
“Our most recent survey report demonstrates once again that the vast majority of Canadian mortgage holders, whether they are first-time buyers or long-time homeowners, are acting responsibly when it comes to reducing their mortgage indebtedness,” said Jim Murphy, president and CEO of CAAMP.
CAAMP found a majority plan to pay off their mortgage in less than 25 years, and at least one-third are taking advantage of current low interest rates to accelerate payments.
Dunning commented that shutting out many first-time buyers from the housing markett, because of the most recent tightening of amortization rules, is a troubling development. This smaller number of first-time buyers is already impacting the resale market, which in turn threatens to dampen economic activity more broadly.
Approximately 17 per cent of high ratio mortgages funded in 2010 could not have been funded today, including 11 per cent of prospective high-ratio home buyers who can’t qualify under the new 25-year amortization rule.
Regardless of whether Canadians initially selected a 20- year, 30- year, or even 40-year amortization period, survey findings continue to indicate that actual repayment periods have generally been only two-thirds of the contracted periods
It is not only first-time buyers who are affected: reduced activity at entry levels means that move-up activity will also be gradually impacted, because potential move-up buyers will find it more difficult to sell their current homes
“Our concern today is the number of growing first-time buyers who are now unable to get a mortgage. We worry that this is having a dampening effect on what was an already cooling market and we hope policy makers will give some thought to addressing the needs of this key sector of the market.”
The resale housing industry is a major contributor to the Canadian economy, generating $22.3 billion annually in additional consumer spending, according to a report from Altus Group Economic Consulting, commissioned by the Canadian Real Estate Board.
The report estimated that every residential MLS® sale in Canada resulted in an average of $46,400 in additional consumer spending, over and above the cost of the home and land.
An estimated 11 per cent of high-ratio home buyers are especially hard hit since the amortization periods were cut from 30 years to 25 years. Some of these buyers can become re-qualified to buy homes by saving for larger down payments and thereby reducing their monthly payments. But on average, it would take these buyers 3.5 πe-qualify, assuming interest rates and house prices do not increase.
A reduction in activity at the entry level will create difficulty for those who wish to sell their homes and move up in the market, creating a slowdown in upper segments of the housing market, according to Dunning.