Last month, Canada’s economic watchdog, Jim Flaherty, announced that the government will once again be tightening the restrictions on residential mortgages. In introducing these new regulations, the finance minister hopes to cool down a dangerously hot housing market, particularly in Toronto and Vancouver.
The government fears that without these new restrictions, a housing bubble could burst suddenly and a crisis similar to that endured by Americans in 2008 would ensue. They include three significant changes: the maximum allowable amortization will be reduced from 30 years to 25 years, refinancing has been limited to 80% of the property’s value (previously 85%), and homebuyers purchasing a property over $1,000,000 will now have to put down at least 20% as they can no longer have their mortgages insured by the Canadian Mortgage and Housing Corporation (CMHC).
These regulations, particularly the reduction in maximum allowable amortization, may have a significant effect on the Canadian real estate market. In my opinion, they are more likely to cause stagnation in overpriced markets than a decrease in prices. For real estate prices to significantly decrease in cities such as Vancouver and Toronto, there would need to be some kind of catalyst (i.e. rising interest rates or rising unemployment). Without such a catalyst, even though buyers may not be able to afford the high property prices, most sellers would not need to sell urgently. In addition to affordability issues, buyers are more reluctant to buy into markets which are supposedly overvalued; the media has bombarded the public with apocalyptic predictions and frightening (and sometimes misleading) statistics. As buyers lack confidence in the real estate market and sellers lack incentive to sell, a gridlock could result, increasing demand for rentals. If I were buying a Condo in Toronto or Vancouver, I would make sure that the home owner’s association does not prohibit you from renting out your property.
I have some qualms about these regulations. Firstly, why should the medicine be given to the entire country when only Vancouver and Toronto are infected? Could they not have implemented a more narrowly targeted solution? Perhaps some cities and towns in Canada are underpriced and this will only worsen the problem. Also, there is the matter of principle; this is yet another example of an overreaching, intrusive government believing that it can do a better job than the market. Are homebuyers not responsible or intelligent enough to decide how high their monthly mortgage payments should be? Most homebuyers are aware of the potential risks such as interest rate increases, unemployment, unexpected expenditures, etc. If one is not aware of these risks, professionals in the real estate and mortgage industry should be able to explain them to their client. These restrictions represent a fundamental distrust in the public and the professionals involved in the real estate and mortgage industries. Does anyone else find this a tad ironic that the government is putting our competency into question?