- Friday, 03 June 2011 08:11
- Heather Wrigh
A true measure of the impact of change is not to look at it from a scholarly level, but to examine the depth to which it manifests itself when it moves from theory into practice.And such is the case with Jim Flaherty’s most recent round of mortgage and HELOC restrictions that were announced in January of this year, and then rolled out in March and April.
Two months later, as the market itself is hot (in some regions almost unbearably, unsustainably so), and the combustible combination of eroding affordability in the face of rising consumer and property prices alike faces mounting levels of consumer debt, the question remains- have these changes helped to lend stability or are consumers still biting off more than they can chew?
Canada is world-renowned for its’ stringent lending policies and many people attribute these to the fact that our economy was able to weather the recent global financial crisis fairly unscathed.
Flaherty’s changes this time around included reducing the maximum amortization on a mortgage from 35 years to 30 years in an effort to reduce interest payments for the average homeowner and to speed up the process of building up equity. He also reduced refinancing of mortgages from 90% to 85%, with the hopeful outcome of encouraging homeowners to save up for things, rather than lumping more money onto their mortgage. The final change was to withdraw government backing from HELOC’s- trying to transfer responsibility for this more consumer debt based product to the lending institution, rather than to the taxpayer.
“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” said Minister Flaherty in a release. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future.”
So, the best measure of what impact these changes have had is to go to the front lines- - to those who are qualifying people to borrow- and to those helping them put their financing to use, and to look at the system itself.
Seemingly, there has not been huge impact, because of the already highly stringent lending policies in place. There seems to be an attitude of austerity and extreme responsibility, generally, when it comes to lending in Canada. This is in stark contrast with the complete economic collapse in the U.S., where the blame has fallen squarely at the feet of irresponsible, freewheeling lending, fuelled by greed rather than the principles of due diligence.
Brad Compton, Mortgage Agent, Invis Inc, says, “Canada has traditionally had quite strict rules when it comes to mortgages....at least when compared to our peers. I think our conservative view when it comes to mortgages is definitely why we fared the "economic meltdown" so well. Our recent changes to the mortgage rules has only strengthened mortgage/housing market.”
Rather, our lending system benefits from having a “worse case scenario” play itself out nearby- and where a market is still feeling the ill effects. A report released this week from the S&P Schiller Price Index, indicates that the US housing market has suffered another double dip in prices in the market- and have now experienced the most significant declines in price seen since the great depression. Despite aggressive and sustained measures, the US housing market cannot seem to get its’ feet back under it, and one can’t help but wonder what things would look like today, had more stringent lending practices been enforced from the get go.
When it comes down to brass tacks, how much does Flaherty’s latest round of changes really factor into daily business and the attitude towards Canadian debt?
While some groups, like CREA, attribute falling home sales earlier this year to the results of these new mortgage restrictions, “changes to mortgage regulations that took effect in April 2011 likely sidelined a number of first-time homebuyers,” said association chief economist Gregory Klump, many in the industry have not seen a huge impact in their day-to-day operations.
Compton feels that the changes are negligible, and suggests that the effects are felt more deeply in the investment community, rather than by the average consumer: “The biggest impact would be on real estate investors who now have to put down 20%. The average homebuyer is not really affected by the decrease in amortization from 35 to 30 years. It really only equates to about $85 on a $250,000 mortgage. The regulations were meant to eliminate those buyers and speculators on the fringes of affordability, which it has, but the average homebuyer is not affected.”
Given the underlying conservative attitude towards lending in this country, perhaps these changes were as much to remind about responsible lending, than to actually effect any change. Much of the lending practice in the country was already reflecting much of Flaherty’s intent by examining many different scenarios before qualifying people.
Kristian Harris, Mortgage Agent with MonsterMortgage.ca, says that there have been high standards all along: “I don't believe they have caused any slow down because lenders were already qualifying clients for high ratio variable rates and higher fixed rates. Our banks are very conservative and even prior to the new rules the banks made sure clients who were taking a variable rate would still have some "breathing room" based on rates increasing.”
“Any client who couldn't afford rate increases most likely was not getting approved to begin with. As for HELOC products for high ratio mortgages...although the government may have approved this product, no lender actually offered it, so the impact was zero. Refinancing from 90% to 85% has stopped some Canadians from refinancing as they may not be able to pull out enough equity to justify the premium, but this is probably a good thing!”
Not all debt is equal
There has been an awful lot of press about debt lately- with concerns over affordability, and mounting debt levels in the country.
While mortgage debt is no question the most sizable debt that a person will take on, it is surrounded with legislation, insurance, due diligence and accountability. Furthermore, although prices vary region to region, there is generally a price appreciation across the country. Mortgages are secured debt- and most homeowners are not facing the prospects of negative equity to the same extent our neighbours to the south are.
Says Harris: “It is credit card and retail debt that hurts Canadians (not mortgages).Although mortgage debt has been discussed quite a bit recently, the reality is that mortgage rates have been low for years and will remain low, whereas interest on credit cards can be as high as 24% annualized. And with a mortgage, you have a debt on an appreciating asset, that's not a bad debt to have”
He suggests that “Maybe stop having credit card companies hand out cards at sporting events and college and university campuses like they are handing out free gum. I think he (Flaherty) needs to worry about credit card companies and other retail finance companies charging 25% to Canadians to buy furniture”
This begs the question- if there is , in fact, this degree of concern about rising debt levels, perhaps legislative eyes should be focusing in other directions- namely towards costly and at times risky, consumer debt. If the goal is to make sure that Canadians are not biting off more than they can chew, shouldn’t we be looking at their total financial plate?
Compton too thinks that the focus needs to be shifted elsewhere.” Other forms of personal debt such as credit cards could probably stand to be overhauled. Department store cards and high interest cards...are all quite easy to get. Most of the people I see who are in credit trouble might have one....maybe two pieces of credit from their bank and then 5-10 pieces of credit from these other providers. Low introductory rates and other promotions seem to encourage people to run up their debt, not thinking of the consequences when that rate resets at a normal 20%+ rate and they have no way to pay it off.”
“The credit card then has you trapped and destined to keep paying them interest for a very long time. The government could put in place rules to limit some of the marketing practices of these credit providers and possibly make it a bit more difficult for people to get debt.”
Majority Government and beyond
While it may be too soon to tell what lies in store exactly for with the new government, there are likely not too many surprises up their sleeve. Although Harper has a majority now, many of the players are the same that have a direct impact on the Real Estate and Mortgage Industries, as is a prevailing attitude of financial austerity.
As Compton says, “It's not really a new government. We have the same prime minister, finance minister and BOC head. It will most likely be business as usual.“
Although there is no question that Canadian debt is on the rise- a recent TransUnion study puts the average amount of non-mortgage, consumer debt at $25,597, a slight rise from this time last year.
There is indeed an appetite for debt amongst Canadians, and as has been suggested, perhaps the focus need to not only be on controlling access to this kind of debt- but in also giving Canadians the tools to manage debt appropriately.
Perhaps Flaherty’s changes were as much about sending a message about fiscal prudence and financial accountability, as they were about restricting lending. And as we have seen, change is as much about context as it is about implementation.