Paul Vieira, Financial Post with files from Garry Marr in Toronto
Published: Tuesday, February 16, 2010
OTTAWA -- Jim Flaherty, the Finance Minister, says he is targeting "reckless" speculators who buy up multiple condominium units in the country's biggest cities with new rules introduced yesterday that will make it tougher for Canadians to get a mortgage.
The reforms were submitted after nearly a week of non-stop warnings from people ranging from a prominent money manager to former Bank of Canada governor David Dodge about an impending housing bubble. The concern was that the real estate market was getting ahead of itself, as buyers took advantage of record-low interest rates to acquire homes.
In introducing the tougher mortgage requirements, Mr. Flaherty said there was "no clear evidence" of a real estate bubble in this country, the kind of which sideswiped the U.S. economy and sparked the worldwide financial crisis.
"The measures will not affect the ability of a Canadian family to buy a house. It will affect those who are speculating," the Finance Minister said. "What we're getting at is the speculation in multiple condominium units in particular which we see in Vancouver, Montreal, Toronto and in some other places in Canada."
Home builders were taken aback by the measures introduced, saying they could result in "severe implications" for the condo and housing markets.
The changes, scheduled to come into effect on April 19, will make it harder for first-time buyers to qualify for government-backed mortgage insurance -- from either Crown agency Canada Mortgage and Housing Corp. or private-sector providers -- which is required if down payments are less than 20% of the property's value.
Borrowers now have to meet standards for a five-year fixed-rate mortgage, even if the buyer wants a shorter-term, variable rate product.
Some analysts, however, indicate the shift is not as big as it appears. Eric Lascelles, chief economist at TD Securities, said the revamped rule likely means the minimum household income cutoff for Canadian mortgage applicants would be about $5,000 to $8,000 higher.
Further, Ottawa has raised the minimum down payment on rental income properties -- where the buyer does not plan to live -- to 20% from 5%.
Mr. Flaherty said one goal is to protect Canadians from overextending themselves financially as interest rates are likely to climb from present historic lows. The other, he added, is to root out speculation in real estate, which he suggested was happening with greater frequency based on prebudget consultations.
"I don't know how that serves the Canadian people and why the government should insure mortgages like that," Mr. Flaherty said. "People can do it with their own money and if they can find someone who will lend them the money on an uninsured basis. But I just don't want CMHC and the Canadian people to be in the business of guaranteeing speculative mortgages."
Derek Holt, vice-president of economics at Scotia Capital, said the condo market could feel the pinch. Industry experts estimate roughly 40% of condo purchases are investment-related, with buyers looking to rent the units for income and perhaps sell them at a later date at a higher price.
"Evidence of the greatest speculative excess has been in the condo segment in the past few years," Mr. Holt said.
Others weren't so sure. Ben Myers, executive vice-president of Urbanation, a Toronto firm that tracks the city's condo market, said the move would have "very little" impact because most condo builders already require down payments of 15% to 20% for their units once they are occupied.
Still, home builders were shocked by Mr. Flaherty's contention that the real estate market was at the mercy of speculators.
"I don't know if they have thought this through as to who a speculator is," said Peter Simpson, chief executive of the Greater Vancouver Home Builders Association. "Just because someone buys a second property doesn't make them a speculator."
He added that these new regulations, combined with the coming harmonized sales tax in British Columbia on July 1, could lead to a "perfect storm" that hits the province's housing market.
The chief operating officer of the Canadian Home Builders Association, John Kenward, said the rule aimed at condo speculation came as a surprise to his members.
"It had not been the subject of conversation [between the government] and the industry," said Mr. Kenward. "It could have serious implications going forward. We don't know why it was introduced."
Overall, Mr. Lascelles said, the economic implications from the proposed moves "are unlikely to be severe, and we expect the housing market to slow its ascent without crashing back down to Earth."
SUMMARY OF CHANGES
*Borrowers must qualify for a five-year fixed rate mortgage instead of a three-year loan when calculating gross debt service and total debt service ratios.
*Refinancing will be capped at 90% for government-backed high-ratio mortgages versus 90% previously.
*A down payment of 20%, instead of 5%, will be required for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
WHAT CHANGES MEAN FOR A $337,000 HOUSE
*The difference between a three-year mortgage rate and a five-year mortgage rate is currently in the range of about 50-100 basis points. The average house in Canada costs $337,000, which means that this change will require that mortgage applicants have the capacity to absorb an extra $2,500 per year in mortgage costs than in the past, according to calculations by Eric Lascelles at TD Securities. Effectively, the minimum household income cut-off for Canadian mortgage applicants is now about $5,000-8,000 higher than it was previously, to fulfill the new rule.