Two days after Wild Bill Morneau dropped da hammer on housing, a confused nation is still trying to figure it all out. But this much is clear: if you have the bulk of your net worth in your house, or sell mortgages, or real estate, or are a moister horny to buy a property, there’s nothing to be happy about.
Here’s why (part three):
The changes amount to a 2% enhancement in mortgage rates, effective a week from Monday. To get a mortgage after that you’ll have to pass a stress test proving you can handle payments at the Bank of Canada’s benchmark rate of 4.64%, and not the current 2.5% (or less). Why is this a big deal? Because 50% of all borrowers today opt for five-year fixed mortgages which do not require that test. Suddenly, in order to get mortgage insurance (everyone with less than 20% equity must) you must pass. It’s estimated at least a third of current borrowers would not.
Therefore they’ll qualify to borrow less money, and unless Mom tops them up, this should translate into reduced demand and lower prices. “Ottawa’s action this time around could weigh on home values,” says mortgage broker Rob McLister, “more than any of the government’s past amortization reductions or down-payment increases.” He’s right. Big impact.
So how about renewals? Will you have to go through this kind of stress test every time your mortgage term runs out?
No. But there’s news here, too. It’s estimated 2,000,000 homeowners will face renewals this year. If they stay with their existing lenders, no stress test at 4.64%. However if the renewal is refused (maybe your income changes or the house drops in value) and you have to deal with another lender, it’s a new mortgage. Yup, stress test.
Guess what? Your lender knows this, too. Do you think you’ll get a sweet, low rate just because you’re an existing client, or will the bank amp your rate up because it knows you can’t shop around? “Clearly giving a bank this much power over the consumer was one of the unseen consequences the poor design of these policy changes naturally created,” says housing analyst Ross Kay. “Anyone foolish enough to believe banks will not profit from this by reducing mortgage discount offers is fooling themselves.”
Maybe that’s why share prices of second-tier mortgage lenders were crushed a little after the news, while the banks fared much better.
Meanwhile, it took only a few hours for the draconian new rules to have an impact in the marketplace. Some of the biggest lenders in the mortgage brokerage business abruptly announced they’re suspending – immediately – several kinds of loans. They include new refinancing, mortgages for rental properties and stated-income loans for self-employed borrowers.
The feds have said flatly that mortgage insurance will no longer be available for anyone with a lower credit score (under 600), who takes an amortization of more than 25 years, who buys a property for more than $1 million or is not an owner-occupier. On top of that, Ottawa is launching a process that the industry is convinced will result in lenders having to foot part of the insurance cost or finance a hefty deductible in the case of default. That, you can be sure, will raise lending rates.
There’s more. Morneau’s own department projects home sales nationally will fall by about 8% in the next year because of the changes. “In the short-term, the change may lead to a temporary reduction in the pace of housing market activity over the next year,” an official said. “While historical data suggest that, nationwide, up to 8 per cent of new home purchases could be affected during the first year of implementation, the precise impact will vary depending on specific homebuyer circumstances and behaviours.”
That may not sound like a lot, but it comes atop a 7% decline in the past year, reflecting a collapsing market in Vancouver. Besides, this is a best-case-scenario number from the Department of Finance. Actual mileage may differ.
Finally, if you need more evidence of why the feds have done all of this, look no further than the Kingdom of 416. Last month sales were up 20% year/year and prices inflated along with them. The average detached is now $1.3 million, and that buys a beater. Values continue to rise because supply is so limited and competition intense. Buying has become painful, if not repulsive, as a result.
Why so few homes for sale? It’s a hallmark of ballooning, unhealthy markets in which people don’t sell because they relish more gains or could never afford to buy back in. But once markets turn and prices retreat, listings swell as homeowners stampede to exit at the best price.
Thinking of cashing in? Don’t mull too long.