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New Mortgage Rules: July 2012

The new mortgage rule changes: How they affect you

The Canadian government, Finance minister Jim Flaherty, feels that the housing market is too hot and that some more tightening of the mortgage rules will cool down the result of record low interest rates. Despite the global economic uncertainty the past few years, the Canadian housing market remains hot from the low interest rates. Previously, Minister Flaherty reduced the maximum 35 year amortization to 30 years and reduced the maximum amount of equity home owners could refinance from 90% to 85%, he has done it once again.

He is reducing the amortization maximum term of 30 years to 25 years and the maximum amount of refinancing of mortgages from 85% to 80%. This means that mortgages buyers will qualify for will be reduced from previous rules. Reducing the amount of mortgage refinancing to 80% means that homeowner’s can’t stretch themselves too thin in mortgage debt.

Also, he is limiting insured mortgages (high ratio – CMHC insured mortgages) to a maximum value of $1-million. This is an effort to help people who aren’t helping themselves.

He feels that people are taking on too much debt that they cannot handle should interest rates rise (which was projected to happen in 2013, but was estimated earlier this week that it will not happen until 2014). These new changes will take effect on July 9, 2012. Having said that, Ottawa projects that these rule changes will only affect less than 5% of the buyers. Buyers will lower their price range, buy a smaller house/condo, or wait/not buy. Looking at prices that have been selling in the last year or so, I have noticed that houses have been selling in multiple offer situations which has a big upward pressure on prices. Multiple offers have still been happening frequently this year and it seems as though buyers are buying frantically. Minister Flaherty is trying to cool down this sellers market and bring it closer to a neutral market. Seeing that interest rates aren’t going to come down because of global uncertainty, changing these mortgage rules will only cool down the housing market as opposed to the Bank of Canada raising the interest rates because it would cool down the entire Canadian economy.

So what does this mean?

Buyers will have less money to work with in terms of what the banks can loan them so their purchase decisions will be more moderate. Sellers might see less bidding wars and prices to come back down to a level playing field. Sellers have been raking in the benefits of low interest rates the buyers are armed with at the offer table. So overall, the housing market will see less frantic buyers thinning themselves out with high end homes.

A question I encounter a lot is: “With all these new condos being built in Toronto, will the market correct because of the over supply?”

What I find is that, no one knows what the future will hold in the real estate market. But looking at the history of housing starts overall in the GTA (construction of new housing units – high rise and low rise combined), the trend of total housing starts has been consistent ranging from 25,000 units in 2000 to 35,000 in 2009 and now back down to 24,671 in 2012, we can see where the market is heading towards. GTA Low rise starts in 2000 was around 16,000 units and it has gradually reduced down to 6,302 this year. We can also see that high rise starts in 2000 was around 6,000 units and in 2012 is at 18,369. With the surge of high rise units in the last decade, people are worried about this ‘condo bubble’ in the GTA. So the trend of less low rise construction starts is probably the city trying to limit urban sprawl and the promotion of intensification (increase of population density) that is causing this shift in housing construction in the GTA. Is there a condo bubble? I don’t see it being a bubble if there is only a limited number of houses for a growing city unless unemployment increases and people don’t want to live in the GTA.

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Having said all that, if you have any questions or need real estate help, feel free to