At an early morning media conference today, Jim Flaherty introduced tighter lending standards that will become effective April 19th. Here is a breakdown of the new rules:
- all borrowers will need to meet standards for 5-year fixed-rate mortgages regardless of whether they’re seeking a loan with a lower rate and shorter term.
- Canadians can withdraw 90% of the value of their homes when refinancing, down from the current 95%
- 20% down payment required for government-backed mortgage insurance on non-owner occupied properties.
Speaking of the changes, Flaherty said, “There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one. Our government is acting to help prevent Canadian households from getting overextended.”
Ironically, this morning another report was issued from The Vanier Institute of the Family’s annual assessment on the Current State of Canadian Family Finances which detailed how overextended Canadians already were. Among other things, the study showed the average Canadian household debt climbed to $96,100, creating a debt-to-income ratio of 145% – its highest level ever.
The report also indicated that there was likely a housing bubble as housing prices in October and November 2009 increased to about $340,000, or 5 times the average after-tax incomes of Canadian households. The long-term average is 3.7 times. The report warned “higher interest rates, changes in mortgage terms and the realization that current prices are unsustainable may cause the bubble to burst.” (Source You can read the entire report below)
Missing notables to the mortgage tightening rules was increasing the minimum down payment for owner occupied properties from its current 5% and decreasing the maximum amortization from 35 years.
Do you think the changes announced today are enough? Will this have any effect on prices?
Those rules will cool the market and limit the speculators. But prices should not change immediately after these rules. The price will be reduced once the rate is up around the mid of the year. Those measures are kind of reminding people that you are dangerous to buy if you do not consider the rate up.
It will be interesting to see how the market reacts. Could be a lot of people making a push to purchase before April 19 when these changes take effect. And even looking at the rate ads on this site, it should have some impact when you need to qualify at 3.7% instead of 1.9%. Still afraid that it may be too little too late, some sort of cover-your-ass move. I think the horse left the barn a while ago, and this isn’t really ‘slamming’ the door shut either…
At the same time, I see these changes giving the federal government and the BoC some flexibility around interest rates. Now, it may be presumed, rates do not have to increase to address any ‘heated’ RE market so there probably won’t be as much pressure on the BoC due to RE concerns.
I’ve always thought that it was in Canada’s best interest (no pun intended) to wait to increase interest rates until the USA goes up first (due to the adverse affect of increasing the CDN-USD rate on the Canadian economy). I’d bet (since I’d be gambling) we don’t see any increases in June/July but follow the US closely in terms of timing…I’d be curious to know what others think.
I just thought it was interesting that the housing price to after tax income ratio is bubbled by 26% over the long term average.
That’s pretty much exactly the percentage I feel the price to rent ratio has bubbled over long term averages as well.
SFH: median price $400,000 – median rent $1550/month – Price/Rent of 258
Historical: 190-200
CM – definitely worth noting the huge discrepancies in house prices vs income and rent.
What I have come to realize (and it is very simple and obvious) is how such a large difference can occur between rental prices and purchase prices.
Simply put: you use CREDIT to buy homes and use MONEY to pay rent. Therefore, rent has kept pace with income and home prices have kept pace with credit expansion. Our debt to income levels are at an all time high in Canada and surprisingly (or not surprisingly) this is accompanied by the highest all time average home price in Canada.
So why are we spending our way out of the crisis (with money we don’t have)? Isn’t this supposed solution just more of the problem? At some point in time I think financial ‘gravity’ will catch up with us all and we will have to change the way we do things…expecting home prices to gain value faster than our debt is a scary and ultimately flawed idea (but it seems the conservatives are using this to their short-term advantage – this was the bulk of our GDP “growth” in 2009). Check with your US neighbour for first hand accounts.
I’m glad the CDN Gov’t stepped forth and did something, even minor, to put some sense into peoples heads and it’s about time.
I was surprised to not see 10% down and 25 year ams being the max, but F hinted that is to come.
With these stricter mortgage rules there will be a drop in house prices after April, usually a very busy season, then again July IF the interest rates go up as well.
2010 will be a rocky year of ups and downs.
Mike F – In 2006 we were going to buy 4 rental homes and were told min down was 25%, did it get changed to 5% (soon 20%) after then?
Mike
On the news recently:
House prices drop off in January
Feb 19, 2010
CHQR Newsroom
A new Conference Board of Canada report shows Calgary housing prices dropped significantly last month compared to the end of 2009.
The average price in the market was $394,493 in January compared to $411,619 in December 2009.
But prices are still above what they were at the beginning of last year when the average home sold for $373,544.
The report also shows there were more than 42,000 listings in the Calgary market.
On Feb 19th, Calgary just passed 3,000 SFH listings, up from 2,500 listings just 2 weeks ago.
It’ll be most interesting to see to what posted rate one has to be pre-approved on. If it’s BOC’s posted rate, then we’re in for a treat. This 5.39% rate is substantially higher than the 3.89% or lower you can get with, say, ING Direct.
I figure if it’s the latter, there’s really no reason for prices to drop. After all, five year fixed is what most people are going for any way, if we are to believe CMHC.
If it’s the former, boy… That would about a 15% reduction in the amount of mortgage one can get.
My guess (not because it’s higher) is it will be the Bank of Canada rate. The BoC is the standard all banks adhere to (or not), but it should be the BoC rate. I’ll say 90% on it.
Anyone notice that a few extremely high single SFH sales are skewing this months avg price too high? See:
$5,300,000 vs $160,000 in 739 sales
Condo inventory is up 20% this month thus far, prices are down MoM over Jan 10.
Maybe Mike can shed some light on what the average seasonal % increase is between end of January and end of February?
A 20% increase might be quite normal.
Will: It certainly will be interesting to see which 5-year fixed rate will be used.
Not Mike F: That’s the nature of averages. If you don’t like “skewing” better just follow the Median where each sale has an equal weight. (It’s what I prefer to follow)
CM: It’s a higher % increase, but inventory levels are still below what they were at this time for the past two years. In 2007 there was quite a condo shortage which led to the bidding wars and surge in prices.
Currently, condo inventory is at 1669, about a 19.5% increase from January’s month-end, but 27% less inventory from February 2008 and 19% less from February 2009.
Metro-Calgary Condo Month-End Inventory
Jan 2007: 886
Feb 2007: 654
Jan 2008: 1926
Feb 2008: 2301
19.4% increase
Jan 2009: 1923
Feb 2009: 2065
7.4% increase
It is interesting to look at the avg. price is up in quite recent a few days. It might be caused by the activities of the higher-end houses, just like Mike-non-F.Mike said.
Mike, can you give a stat of sold numbers of houses over 800K for each day in this month? Thanks a bunch.
-
Mike Fotiou says: Between Feb 1-21 a total of 37 properties have sold for $800k+. Here’s how many sold daily during those three weeks: 5, 1, 2, 2, 3, 1, 0, 1, 3, 3, 2, 1, 0, 0, 0, 3, 4, 2, 2, 1, 1
The seasonal changes we should expect in February according to my stats:
Inventory increase 12% (we are above that already). This is increasing above seasonal expectations but still very low.
I don’t think we will get close to 7000 this year “Not Mike F”. My guess is 4500-5000 at most.
Off topic: I remember last fall you went on about diminishing sales volumes. Why aren’t you commenting on the increase in sales this month? If you’re going to look at data, you need to approach it systematically and not discard information that might not suit your argument.
Sales :New Listings 48% – right on target according to January’s data. This is the best leading indicator and its kind of meh right now.
Mean price usually goes up 3.5% over Jan-Feb (it’s gone up over that so far, 460k instead of 457k). This might be from a few expensive homes as people have mentioned.
Median also is increasing as expected (it should be around 415k on Feb 28 and its 413k so far). I was really surprised when I saw that median should be so high from the seasonal changes but lo and behold it is turning out.
Listings are slightly ahead of pace – we should expect 1977 according to January’s stats. I’m not sure exactly what they are this February but my guess from Bob Truman’s data is 1480 or so.
Sales are right on pace – should be 990 and it’s almost exactly that.
Days on Market is also right on target for February. A decrease from 43 to 33 was expected and its 34 so far.
Mike not Mike F – your high end homes are not affecting the median home price.
All in all, January – February looks very close to what seasonal changes have been with a slight bearish increase in inventory and listings. Prices are up in line with seasonal expectations – I don’t think its’a few high end houses as some people here suggest. Last August when the most expensive house in Calgary was sold, many people including Garth Turner wrote off that month’s prices as a statistical anomaly and they turned out to be wrong in the months that followed.
I should mention my “seasonal expectation” data only goes back to 2005 and probably represents bull years more than bear years.
The main force of price up in Feb. is due to some sales of high-end houses. Thanks to Mike’s stat, we can know that 37 sold listings above 800K. If we assume that average price of 37 sold properties is 200K. Then this actually moves the total average price up to 37*200K/739=10.01K. If we deduct them, then the average for the month is around $452K something.
We can see, from the current stat. that there are a lot of activities associated with move-up buyers in the market. In consideration of those buyers not being the mainstream, the market will be much violated in the coming months for sure.
Sorry for the typo, the avg. price assumed should be 2000K. then this gives 37*2000K/739=100K. that means reduction from $462K to $362K. If we assume that the avg. price for the high end houses is 1000K, then this gives 37*1000K/739=50.07K.
It means avg. price will be $412K something.
So, the high end house pulled up the avg. price. This month is not good for the first-time buyer.
And this trend will not possibly continue in the coming months.
daniel:
You are assuming in your calculation that all houses over $800,000 are on average worth 2 million. That’s not correct. I don’t understand your math but it looks like you are trying to calculate a median which is already being reported.
I think you’d really be better of looking at the median prices. It looks like you are trying to convince yourself that prices are less than they actually are. Also a starter home is not an average home.
I would argue that prices went up between January and February because that’s what happens almost every year. Median price is almost right in line with the usual January-February trend.
Jimmy,
Assume avg. price for those 37 high end houses is 2 million, then this actually pulls up the total average for the 21 days with 100K. Assume avg. price is 1 million, this also pulls up with 50K. It is quite easy to understand. It is reasonable to assume the avg. price over 1 million because there are so many 5.3 million, 1.97, 2.95, etc.
The conclusion is that those sales (high-end houses) pull up the whole average price a lot for this month. I noticed that the median price is up also, so I guess that more buyers are move-up buyers. Thanks.
-
Mike Fotiou says: The average of those 37 was $1.215M. Without any of those $800k+ sales, the average would be $420,531 with a median of $403,500. What I don’t understand is why you would arbitrarily take those sales out of the average equation — it’s not like they weren’t included in previous months average calculations.
Perhaps we should remove all sales of vacant lots, attached homes (duplexes, non-condo townhomes, etc) and foreclosures when calculating the SFH average as well?
Like I said earlier, that’s why I prefer the median. It takes care of the upper and lower price anomalies equally.
Good comments by Mike. Average price itself says nothing. We need look at all indexes, including sales, median price, ab. rate, etc.