Will Dunning, the chief economist for the Canadian Association of Accredited Mortgage Professionals (CAAMP), was a keynote speaker at a previous WinnipegREALTORS® forecast breakfast. He provided some keen insight into a troubled Canadian economy, which, thankfully, Manitoba was able to ride through relatively unscathed. At the time, he predicted Manitoba would fare better than some more recession-prone provinces, however, his sober analysis was not altogether benign for Manitoba.
This spring, Dunning authored a report on the residential mortgage market. It includes results from a Maritz Research Canada consumer survey of more than 2,000 Canadian consumers in April 2013. Moreover, the report contains other data and analysis to explain some of his previous predictions and commentary on the Canadian housing market.
The survey results show that, despite all the media attention and warnings of problems with Canadian household debt, the actual situation is not anywhere near as bleak and foreboding. One reason mentioned in Dunning’s report is the fact that the low interest rate environment is expected to continue well into 2014 — and even beyond.
He earlier reported on projections about how vulnerable Canadians are to interest rate increases when, and if, they do occur in the future.
“Through analysis of large datasets of individual mortgage transactions, the January 2011 report found that the vast majority of these borrowers are positioned to afford payment increases that would result if their interest rate rises to a five-per-cent rate,” he commented. “In total, about 2,000 to 2,500 recent home buyers (those who purchased in 2010) might have Total Debt Servicing (TDS) ratios of 45 per cent or more. The report concluded that this is an extremely small number relative to the total number of homeowners in Canada.
In addition, data generated this spring in the consumer survey has yielded some additional findings. As was discussed in an earlier section, substantial shares of mortgage borrowers have voluntarily increased their regular payments and/or made lump sum payments. These payments reduce their potential amortization periods to less than the contracted periods. It means that, if interest costs increase to unaffordable levels, the borrowers can often reduce their payments (within the limits imposed by the contracted amortization period).
What is documented in the 2013 survey is that the average mortgage rate is actually lower than last year’s (3.52 per cent compared to 3.64 per cent last year). An average 69 per cent of respondents have fixed rate mortgages, which goes up to 85 per cent for those consumers who took a mortgage out in the last year. Most homeowners also plan to repay early, with an expected average around 21.6 years.
Another encouraging statistic reported by Dunning reported is that Canadian homeowners have what amounts to 67 per cent equity in their homes, leaving a debt ratio of 37 per cent. Those homeowners with less than 10 per cent equity in their home only represent a four per cent share of all owner-occupied dwellings. The share just rises to seven per cent for those Canadians who still have mortgages on their home. In total, 83 per cent of Canadians in owner-occupied dwellings have 25 per cent or more equity in their home, which drops to 73 per cent for those with mortgages.
“CAAMP’s Fall 2012 report, Annual State of the Residential Mortgage Market in Canada, Dunning wrote, drew a conclusion that changes made to mortgage insurance criteria (which took effect in July of 2012) had the potential to have prolonged negative consequences for Canadian housing markets. Most other analysts have acknowledged that there has been an impact, but have also stated that the impacts should be short-lived, and markets will soon return to prior levels of activity, as was seen following prior policy changes.
“Nine months later, the expected rebound has not yet materialized, as is clear in data from the Canadian Real Estate Association.
“But, the policy change of July 2012 would have disqualified 11 per cent of high ratio mortgages that had been approved in 2011. The analysis also considered that borrowers who were negatively affected could become qualified once again by saving larger down payments: on average it would take 3.5 years to save the necessary additional down payments — if the borrowers could save 10 per cent of their pre-tax incomes (which would be a major challenge for most of them, and therefore actual savings periods would often be even longer).”
To add to the reduced amortization period from 30 to 25 years in July 2012 and tighter regulations in general, in a Manitoba context, you also have to factor in the introduction in 2012 of the PST to home insurance and CMHC underwriting insurance for high-ratio mortgages.
Let us also be reminded that first-time buyers are not exempt from the highest land transfer tax rate in the country starting at the lowest threshold level of $200,000. The land transfer tax is an up front cost you must pay before taking title to your new property. In Ontario and B.C., who both share high land transfer taxes with Manitoba, they at least recognized many years ago that land transfer taxes can especially impact first-time buyers negatively. As a result, first-time home buyer exemptions exist in both provinces.”
Can you say WinnipegREALTORS® was surprised when it saw a drop in sales activity in March 2013, three times greater for sales under $300,000 than above? No, and while weather had a lot to do with the sharp decline in March sales overall, there is no question first-time buyers are being more impacted as a result of tighter mortgage regulations and other local market factors.
Year-to-date MLS® sales as of the end of April were down 11 per cent, while dollar volume was off five per cent.
As WinnipegREALTORS® and the Manitoba Real Estate Association have indicated in their campaign to seek land transfer tax relief, the economic impact of less sales activity is substantial. For every sales transaction, there is an economic spin- off of over $40,000 and employment creation too.
Dunning makes this point very clear in this spring report: “Reduced resale activity brings lower incomes and employment across industries that are directly and indirectly involved in sales, financing, legal services, moving, renovations and repairs, sales of furniture and appliances, landscaping, etc.”
Government at all levels need to be reminded that housing is a key economic driver in our economy. So be careful what you do to slow it down, as the consequences may be more prolonged and more damaging than you think.