Forget about price-to-rent or income ratios, historical averages, inflation rates, or trying to tie housing prices to other fundamental measures.
No, the catalyst for depressed housing prices will be the same as what started and exacerbated the boom in the first place: access to credit and the accompanying mortgage rules.
It’s no coincidence sales and prices surged in tandem when amortizations were extended 15 years. A report by the City of Calgary stated that:
Our analysis of CMHC rule changes on Calgary prices indicates that for every year that insured mortgage terms were extended beyond 25 years Calgary house prices rose by between $6,000 and $10,000. Between 40% and 70% of residential price changes in Calgary between 2004 and 2009 can be attributed to CMHC amortization rule changes.
In addition, even more buyers who previously wouldn’t have qualified were afforded the opportunity of homeownership because of the implementation of 0% down.
Incomes weren’t remotely close to matching the increases seen in housing prices. “Housing prices have risen 89 per cent since 2002 — vastly outpacing family income gains,” said Sal Guatieri, a senior economist at BMO Capital Markets. (April 2010)
Fueling the housing boom further were the low interest rates as the Bank of Canada tried to keep inflation within their target zone.
“There is no doubt that record-low mortgage rates have juiced Canada’s housing market,” says Sal Guatieri.
Now after Canadian home prices and debt levels have already reached historical highs, it seems that a push to close the barn door is underway.
Last spring mortgage rules were tightened and almost instantly sales plummeted nationwide. Whether this was cause and effect or just pulled forward demand that had dried up is debatable. What is more cut and dried is what a further clamping down would mean to prices.
There is real speculation that the maximum length of amortizations for a mortgage will be lowered again, down to 30 years from 35. Also in consideration is a controversial proposal to increase the minimum downpayment required to buy a home from 5% to a higher figure. Now, some are saying rules are being discussed that would add 100% of condominium fees to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage, up from its current 50%.
If you don’t think these changes will have a wide, far-reaching impact on the real estate industry in Canada, all one has to do is see the reaction from some in the industry:
Brad Lamb, a real estate broker and developer, says: “All it is a knee jerk reaction by idiot bankers pressuring idiot politicians.”
CREA released a “call to action” last week to more than 100,000 members urging them to write their Member of Parliament (MP) to explain the negative impact additional mortgage financing rule changes would have on home buyers, home owners and the economy.
CREA stated that “these changes would create affordability problems, especially for first-time buyers…further tightening of mortgage rules would have other far reaching consequences for the economy. It risks causing a home price correction, a drop in the net worth of Canadian households, lowered economic growth and reduced tax revenues.”
First-time buyers are lifeblood of the real estate industry. Without them, everything will grind to halt. This is why its disingenuous to speak of someone being “priced-out forever.” The moment a large portion of would-be first time buyers are “priced-out”, the market has overreached and is due for a correction. What has prevented this from happening was the access to credit and low interest rates.
If you’re trying to time the market, it all hinges on how Mr. Carney & Mr. Flaherty plan to act (or not act) in the upcoming year.