Baby, we got a bubble!?

[interested]

I agree cdr.

We do have a social responsibility to ensure that we do not provide everyone with all the equipment necessary to harm themselves without at least making an effort to put in some safeguards.

Let's hope we do get the "soft landing" alot of individuals are talking about and that the government has the time to continue to slowly tighten rules so we eliminate this or at least minimize this as a future risk going forward. It is clear from the baby step taken and the vested interests and political expediency, that a full fix will not be undertaken in the forseeable future.

 

[cdr108]

as an aside, the lowering of amortization from 35 to 30 years cuts out ~10% borrowing power.

in one of the G&M articles, a mortgage broker stated that 9 of 10 first-time buyers coming into his office have gone with a 35-year amortization.

now the small condo units market prices will depend on how smart that demographic is ...

if they rush in to beat the changes, they will instantly overpay by 10%;
if they wait, i can see prices dropping quickly since the vast majority of pre-con units are the small ones that cater to the first-time buyer/specuvestor.

 

[interested]

care to hazard a guess as to which will happen?
My bet is there will be a small minirush, not enough to increase prices but to hold them for an extra couple of months.
The speculators one would think would be starting to get the message at current prices and with government interfering in the market, that speculation is over.
Investors: again if you believe what some write that alot of investors are from Asia and other parts of the world and parking their money here (and do not take mortgages in alot of cases) should probably not make a difference.
Generally local investors and I am sure alot of foreign ones buy smaller units as easier to rent out.
I wonder what impact this will have on the moveup market and the higher end.
Generally, the moveup market depends on people down the totem pole moving up as well thereby allowing everyone to climb. If we just took away some of that demand, logic would dictate that after a brief flurry of 2 months if it happens, we should slowdown in the next market.
Typically, the high end luxury market slows first. Tends to be more savvy investors (if you buy that) who see trends earlier. Though recent literature/data from brokers suggests the mid high market and the high market is getting lots of international interest.
Perhaps just a reflection of the "rich getting richer" and everyone else being left behind?

 

[TrickyRicky]

An interesting test case to watch. If these changes have a substantial impact we know that the market is dangerously sensitive to lending condition variability.

Who relies on CMHC backed mortgages anyway? More stringent lending conditions are great because they protect you against your worst enemy, yourself.

 

[cabbagetowner]

i'm guessing there will be decrease in sale numbers this year and for prices to stay flat this year. writing's been on the wall for some time, so i think people are sitting, i doubt the new mortgage rules will cause any minirush, it will just take some steam out of the market.

 

[Bloor West Villager]

I believe the new rules only impact new mortgages, not renewals. Similar to when maximum amortizations were reduced from 40 to 35 years, those homeowners had the option to renew at their original 40 year amortization when their terms expired, but it became a grandfathered product unavailable for new buyers.

Politically, increasing downpayment minimums risks alienating the "urban vote" where an increase from 5% to 10% equates to tens of thousands of dollars in these housing markets. Not that it wouldn't be the right thing to do anyway, but our government is well aware of how many seats in the House of Commons are filled by these voters.

 

[interested]

^^^
I am fascinated by what I am reading here Nhincompoop.
I would not know but I am amazed that you are saying that people would have a 40 year guaranteed renewal going forward.
Does that mean each and every time or are they grandfathered over 1 renewal for the next 5 years.

My impression of mortgages was that each time you renegotiate it is essentially taking a new mortgage and the institution is under no obligation to renew so I would be suprised they would continue 40 year terms. And unless you would qualify for CMHC, I would doubt the banks would want to continue those long terms, but maybe they would. They certainly make alot of interest on those 40 year terms, especially in the very early years.

 

[KA1]

http://www.theglobeandmail.com/repo...debt-worries-trump-home-sales/article1872727/

 

[cdr108]

I believe the new rules only impact new mortgages, not renewals. Similar to when maximum amortizations were reduced from 40 to 35 years, those homeowners had the option to renew at their original 40 year amortization when their terms expired, but it became a grandfathered product unavailable for new buyers..

i don't know if this is the case, but it really does not make any sense.

eg. if the original mortgage was 5-year term/40-year amortization, after the 5 years have expired and the mortgage comes for renewal, effectively one has 35 years left on the amortization ... similarly for 5/35 resulting in 30 years left.

i can't see why anyone would want to extend the amortization an extra 5 year back to 40 years (or 35 years in example 2) unless one has really over-extended themselves to the point one has to; or one loves to continue to be indebted for a life-time and pay the financial institution $10,000s+ more interest with barely any equity to show for it ...

in that case, why not rent, because that's effectively what one is doing from the bank ... and in reality, it's cheaper now to rent than carry a mortgage, maintenance, property taxes, etc.

 

[Bloor West Villager]

^^^
I am fascinated by what I am reading here Nhincompoop.
I would not know but I am amazed that you are saying that people would have a 40 year guaranteed renewal going forward.
Does that mean each and every time or are they grandfathered over 1 renewal for the next 5 years.

My impression of mortgages was that each time you renegotiate it is essentially taking a new mortgage and the institution is under no obligation to renew so I would be suprised they would continue 40 year terms. And unless you would qualify for CMHC, I would doubt the banks would want to continue those long terms, but maybe they would. They certainly make alot of interest on those 40 year terms, especially in the very early years.

I'm not 100% sure, so I welcome someone more knowledgeable to weigh in here, but I don't think they can just shrink your amortization once your term is up. But rules may be different for non-conventional mortgages. I don't know anyone with a 40-year amortization though.

 

[Bloor West Villager]

i don't know if this is the case, but it really does not make any sense.

eg. if the original mortgage was 5-year term/40-year amortization, after the 5 years have expired and the mortgage comes for renewal, effectively one has 35 years left on the amortization ... similarly for 5/35 resulting in 30 years left.

i can't see why anyone would want to extend the amortization an extra 5 year back to 40 years (or 35 years in example 2) unless one has really over-extended themselves to the point one has to; or one loves to continue to be indebted for a life-time and pay the financial institution $10,000s+ more interest with barely any equity to show for it ...

Sorry, that wasn't what I meant and I see now how my choice of words were misleading. In raising the 40-year amortization example, I meant to illustrate that just because the product was no longer offered, didn't mean that people didn't continue down a 40-year amortization. So after 5 years, they would renew with 35 years left, etc.

The parallel I'm trying to (poorly) draw is that while 35-year amortizations are going away in March, people who got a 35-year amortization last year would still be "in the market" once new rules kick in - they wouldn't be forced to condense their amortization, so there is still a risk of overextension, heavy debt load, etc.

 

[cdr108]

http://www.theglobeandmail.com/repo...debt-worries-trump-home-sales/article1872727/

the article:

Debt worries trump home sales
STEVE LADURANTAYE, GRANT ROBERTSON
From Tuesday's Globe and Mail
Published Monday, Jan. 17, 2011 10:11AM EST
Last updated Monday, Jan. 17, 2011 8:34PM EST

Finance Minister Jim Flaherty is betting that Canada's cooling housing market is strong enough without the fringe buyers who have been propping it up.

Housing has been key to Canada’s economic recovery; prices are now higher than they were prior to the recession, and construction activity has been healthy. But home sales are now under pressure from the threat of higher interest rates, and Mr. Flaherty’s latest move to curb 35-year amortizations stands to eliminate a number of potential buyers from the market.

Mr. Flaherty, citing concerns that Canadians are taking on too much long-term debt, said Monday the government would no longer insure mortgages that take longer than 30 years to pay off. Ottawa will also tighten the rules for existing homeowners who want to refinance their homes, by lowering the maximum amount Canadians can borrow to 85 per cent of the property’s value, and will no longer provide insurance on personal credit lines secured by homes.

The impact on home prices is expected to show up quickly. BMO Nesbitt Burns deputy chief economist Douglas Porter said resale prices could drop as much as 7 per cent within the next 12 months because of the change to amortization lengths, as buyers who would have opted to spread the cost out over 35 years are forced instead to take out borrow less in order to keep their payments affordable.

“You can make the case that existing home owners will see their prices go down,†he said. “You can go back to basic economics – it is the marginal buyer that really drives the market. If the buyer isn’t there, the price has to drop until you get down to the next buyer.â€

Mr. Porter’s forecast underscores the difficult balancing act that faced Mr. Flaherty in deciding on how to change the mortgage rules. Canadian household debt is at record levels, and much of that debt is related to real estate -- so any serious action on debt had to focus on mortgages. But at the same time, the government does not want to go too far, and risk triggering a broad housing correction that would hurt both consumer spending and the economy.

The average Canadian resale home sold for $344,551 in December. Assuming an interest rate of 4 per cent and the minimum 5 per cent down payment, a 35-year mortgage would have monthly payments of $1,441. Shortening the amortization period to 30 years increases the monthly payment about 8 per cent, to $1,555.

Some expect the government is on safe ground. Toronto-Dominion Bank expects that average house prices will slip by 2 per cent and that 20,000 fewer sales will take place this year because of the change. Craig Alexander, the bank’s chief economist, said the housing market ended 2010 better than he expected, but the mortgage changes will keep a lid on growth.

“If you think of home prices over the last 10 years, that’s not a big drop,†he said. “And really, if someone can’t afford 30 years instead of 35 then I’m not sure they should be buying a house anyway. So it cools the market a little bit, but I don’t think it leads to significant weakness.â€

The changes come as banks are concerned about slowing loan growth. But some bankers and analysts believe the changes will remove only the riskiest borrowers from the market.

Still, those same customers helped fuel rapid growth in new mortgages for the banks since the government expanded amortizations to 40 years in 2006.

“It’s fair to say that the changes being put in will work to slow loan growth by removing the marginal borrower from the market,†said Robert Sedran, a banking analyst with CIBC World Markets Inc. “We had already expected that loan growth to slow – not because we necessarily expected some government mechanism to come into play – but simply because at the pace at which debt levels were climbing we didn’t see it as sustainable.â€

The Canadian Real Estate Association said changes made by the government last year that made it more difficult for applicants to qualify for mortgages have already slowed sales, and that prices have leveled off across the country through the autumn. Randall McCauley, the group’s vice-president of government relations, said the association is concerned that changing amortization rates is too blunt an measure for a market in transition.

“The amortization change is not a precise instrument – you can’t make a change and know it will have a certain effect,†said CREA vice-president of government relations Randall McCauley.

Mr. Flaherty acknowledged it’s difficult to gauge the effect of the change, but said the danger of debt loomed too large to ignore.

“This is not arithmetically predictable, precisely,†he said. “We expect some moderation in the market. We’re taking these steps in any event now because of our concern about higher interest rates down the road.â€

The Canadian Association of Accredited Mortgage Professionals, which represents the mortgage brokerage industry, released a study late last year that showed mortgage debt in Canada surpassed $1-trillion for the first time in 2010. About 22 per cent of all new mortgages had amortization rates longer than 25 years, up from 18 per cent the year before.

==============

from another G&M article, it quoted a mortgage broker who indicated that 9 of 10 of his first-time buyer clients opted for 35 year amortizations.

with those 2 statements, can we surmise that first-time buyers are 25% of market share;
and the majority really have no business buying at this time at inflated prices, if it's necessary to max the amortization to 35 years to 'afford' something ?!?

either way, if 1 of 4 buyers need longer than 25 years, something is fundamentally wrong and prices are too high.

 

[cdr108]

Sorry, that wasn't what I meant and I see now how my choice of words were misleading. In raising the 40-year amortization example, I meant to illustrate that just because the product was no longer offered, didn't mean that people didn't continue down a 40-year amortization. So after 5 years, they would renew with 35 years left, etc.

The parallel I'm trying to (poorly) draw is that while 35-year amortizations are going away in March, people who got a 35-year amortization last year would still be "in the market" once new rules kick in - they wouldn't be forced to condense their amortization, so there is still a risk of overextension, heavy debt load, etc.

ah, i hear what you're saying .

unfortunately, one can only save themself ... however, as the US has shown, the marginal can dramatically affect the majority

 

[interested]

cdr, I believe that the 2nd article is talking about actual numbers wherreas the one mortgage broker is talking anectdotally about his own personal experience.

None the less, fi the anectdotal evidence is correct, then your assumption follows. And yes, people really have no business buying with 35 or 40 year mortgages in my view.

However, an investor with a short, say 5 year time horizon, may justify this since his intent may be to hope for the capital appreciation and worry less about the cash flow. In that case, it may make sense to him. I am not saying I approve of the stategy, just saying there may be some logic to it.

I am not sure that 1/ in 4 buyers need longer than 25 years, it may just be that they choose the longer time frame so as to increase their cash flow in the earlier years so they have more discretionary income. Again, not a rational that I think is smart in the long term since it means just spending the money on other things. More purchases being made today to satisfy wants early on.

 

[cdr108]

http://www.theglobeandmail.com/glob...r-backs-the-crackdown-on-debt/article1873635/

Why one mortgage broker backs the crackdown on debt

ROB CARRICK | Columnist profile | E-mail
From Tuesday's Globe and Mail
Published Monday, Jan. 17, 2011 5:59PM EST
Last updated Tuesday, Jan. 18, 2011 6:51AM EST


Thanks, Jim Flaherty, we needed that.

It’s surprising to find positive reviews from mortgage brokers for the federal Finance Minister’s efforts to curb growth in household debt, given that home sales are bound to suffer. But brokers have a close-up view of borrowing patterns and what they’ve been seeing suggests we do, in fact, have a debt problem that requires action.

Ottawa’s three-pronged announcement Monday will effectively eliminate 35-year mortgages for home buyers who need mortgage insurance, lower the maximum amount that people can borrow in refinancing their mortgage and put an onus on lenders to be more careful about which customers get home equity lines of credit.

“It’s a tough little set of measures that will pull back the excess availability of credit,†said John Cocomile, a broker with GreedyMortgage.com in Toronto. “I think it’s fantastic. It’s too bad the Americans didn’t do this three or four years ago, or the mess they’re dealing with wouldn’t be nearly as bad.â€

The Bank of Canada is worried about how indebted Canadians are, big bank executives have spoken up on the subject and now the federal government has shown how concerned it is as well. Borrowers, as Mr. Cocomile tells it, have been oblivious. As a result, they need to be saved from themselves.

At Mr. Cocomile’s office, nine of 10 new home buyers have been choosing to pay off their mortgage over 35 years. Starting March 18, 30 years will be the new ceiling for people with down payments of less than 20 per cent.

The extra interest charges resulting from an amortization period of 35 years as compared with 30 years can amount to tens of thousands of dollars. Mr. Cocomile said clients who are informed of this typically say they intend to start paying down their mortgage at the earliest opportunity. Does that actually happen?

“No,†Mr. Cocomile said. “I’ll follow up with them and say, ‘Why don’t we ramp up payments?’ They say, ‘Oh, we have a car loan now, or we spent some money on renovations, or we’re trying to get rid of credit card debt.’ Credit’s so easy – everyone’s using it.â€

Requiring people to pay off their mortgages over a shorter period means they must either pay more per month, or buy a cheaper house. So it’s hard not to see home sales suffering as a result of the new measures in pricey cities like Toronto, where David Larock is building up his new mortgage planning business.

“None of these measures will be popular with mortgage brokers and realtors, but Canadian debt levels were climbing to alarmingly high levels,†said Mr. Larock, a onetime employee in a big bank’s mortgage department. “I don’t like it, but for the long-term health of our market I think it’s short-term pain for long-term gain.â€

Mr. Flaherty said his prime concern is that people are borrowing to the maximum at a time of low interest rates. Rising rates will make the debt load less manageable, but people haven’t shown any inclination to alter their behaviour in the housing market and in other forms of borrowing.

That’s why the government is lowering the maximum people can borrow through a refinancing of their mortgages to 85 per cent of the value of their home, down from 90 per cent. Mr. Cocomile said he’s seen strong demand for refinancings from people who have run up other debts and want to consolidate them in their mortgage.

Whereas you can get a five-year mortgage at 3.85 per cent, a typical credit card would charge about 19 per cent. But refinancing to the maximum drastically reduces your home equity and leaves your house vulnerable if you can’t keep up with your mortgage when interest rates rise.

Home equity lines of credit have become one of hottest borrowing tools around, but they’re getting the lightest treatment from Ottawa. Instead of targeting borrowers directly, the government is putting the onus on banks to lend responsibly. Starting April 18, government-backed insurance will no longer be available to banks to cover losses from customers with lines of credit.

Interest rates on new home equity credit lines could rise as a result, or it could become tougher to qualify for one. Call this another example of how protecting Canadians from themselves comes at a cost that even people who make their living in the housing market think is worthwhile.

“You can totally realize why the Finance Minister is imposing these rules,†Mr. Cocomile said. “As interest rates nudge up, people won’t be as pressed as they might have been.â€

Changing Mortgage Rules

Starting March 18, people buying a home with a down payment of less than 20 per cent will be able to take no more than 30 years to repay the loan, down from the current maximum of 35 years. Here are two ways the changes will affect people.

1.) The maximum affordable house price falls

Example: A couple with household income of $120,000 and a 10 per cent down payment.
Maximum house price with a 35-year amortization: $620,000
Maximum house price with a 30-year amortization: $560,000

2.) Monthly payments rise (but the amount of interest paid over the long term falls)

Example: A $300,000 mortgage at 4 per cent
Monthly payments over 35 years: $1,322
Monthly payments over 30 years: $1,427
Additional monthly cost: $105
Total interest savings: $41,850

Source: John Cocomile, Department of Finance