Amortizations Come Full Circle

Six years later and we’re back where we started, albeit now even more heavily indebted and with housing prices having skyrocketed (or still skyrocketing) in cities across Canada.

The Department of Finance confirmed this evening that for the 4th time in 4 years they’re backpedaling on the mortgage rules, reducing the maximum amortization for an insured mortgage to 25 years from the current 30. Refinancing loans will also be reduced to 80% of the value of a home from the current 85%.

CAAMP’s response is predictable:  “The data we have has shown that Canadians are acting responsibly,” their CEO argued, adding that Mr. Flaherty said just three months ago that no new rules were coming.   Was CAAMP vocally opposed to the reckless extension of amortizations from 25 to 40 years back in 2006?  So no real surprise that their self-serving warnings earlier this year went unheeded on Parliament Hill.

When will these rules be implemented?  What effect will this have on the housing market?   Apparently, even the big banks were “caught off guard” with this announcement so I’ll have their responses posted in the comment section below as they are released.

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20 responses to “Amortizations Come Full Circle

  1. CIBC economist Benjamin Tal said these changes will have a greater impact on the market than the last round did.

    “The move from 35 to 30 years was very different than from 30 to 25. It’s not linear — 30 to 25 is much more significant,” he said.

    The government has realized that the Bank of Canada cannot do anything about the housing market at this point and has chosen to step in, he added. The goal is to achieve a soft landing without pushing the market into a correction that goes too far.

    He described the moves that Ottawa has chosen as a “gentle push.”

    “The fact that they didn’t change down-payments is a realization that doing so would probably be too severe given that the market is slowing down,” he said.

    Source: Globe & Mail, June 20, 2012

  2. From BNN’s twitter feed:

    -Ottawa says new mortgage rules will go into effect July 9.

    -Ottawa sets home value cap of $1 million on insured mortgages and caps mortgage payments at 39 percent of gross personal income

    -BMO says the amortization change put in place by Ottawa is equivalent to 0.9 percent point mortgage rate increase

  3. Mike

    Flaherty’s comments at http://www.fin.gc.ca/n12/12-070-eng.asp

    Myke

  4. BMO Bank of Montreal today strongly endorsed changes to Canada’s mortgage market.

    “The changes announced by Minister Flaherty are prudent, measured, responsible, timely and aligned with BMO’s ongoing efforts to encourage Canadians to choose a mortgage with a shorter amortization,” said Frank Techar, President, Personal and Commercial Banking, BMO Bank of Montreal.

    “BMO believes the new measures will support the long-term stability of the Canadian housing market. Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada’s housing market experiences a soft landing.”

    (Press release source)

  5. Finally!!! this and the coming OSFI changes are exactly what was needed. Credit expansion does not equate to a “real” housing boom. Credit contraction will prove this to be true as is happening now.

  6. Are there any stats on the percentage of homes sold in Alberta that rely on 30 year amortizations?

    I don’t have Alberta specific stats, but it was 40% Canada-wide according to CAAMP’s 2011/2012 figures up until May.
    -Mike Fotiou

  7. CIBC’s response:

    We expect the current change to have a much more significant impact on the market in general and first-time home buyers in particular. We estimate that the direct impact of this move alone might cut the value of mortgage originations by close to 2%.

    The combined impact of the four changes will not be large enough to derail the housing market, but are clearly significant enough to soften activity, and at the margin will act as a negative for house prices—mainly at the mid-range segment of the market.

    Read the entire report here

  8. TD Bank’s response:

    We view the changes announced today as a prudent decision to address the increasing risks from consumer debt growth.

    Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate.

    The actions support our long standing view that the current 10-15% overvaluation in Canadian real estate will be unwound over the next couple of years. It also suggests that personal debt growth should slow to a low single digit pace over the coming year

    Read the entire report here

  9. Scotia Capital

    Home sales will accelerate very briefly over the next couple of weeks before the July 9th implementation period. We are more convinced of our view that the BoC is on hold until mid-2013 and with fatter tail risk in favour of a longer hold.

    Our bias is that strong cumulative regulatory tightening pushes out rate hikes, supports a buy-Canada-bond bias, poses downside risks to CAD, and will materially soften growth in housing, consumer spending, jobs, and add to already evident slowing in credit growth.

    BMO Capital Markets

    The reduction to a 25-year from 30-year period is equivalent to about a 0.9 ppt mortgage rate increase (assuming a 3.3% 5-year fixed rate and a $290k mortgage after 20% down on an average-priced $363k home).

    Notably, the impact is bigger than the switch from 35- to 30-year mortgages, which at current mortgage rates, would be equivalent to about 0.6 ppts of tightening.

    It’s also important to keep in mind that the amortization change won’t impact affordability across the entire market, but rather those that would be taking a 30-year amortization—according to the Canadian Association of Accredited Mortgage Professionals, that made up 40% of mortgages for purchase during 2011/12 (up to May).

    (Source)

  10. Pingback: New Mortgage Rules Announced | Calgary Real Estate Review

  11. Mike – do you know what happens at the end of a mortgage term that was insured by the CMHC? Is the insurance on the life of the mortgage, or just the current term (i.e. CMHC removed once equity is > 20%)?

    Also, I would assume that CMHC mortgages with a 30-yr amortization on their current term will have to move to a 25-yr amortization on renewal? What if this causes their payments to exceed 39% of gross income?

  12. TT, there weren’t any new rules requiring requalifying at renewal implemented.

    Edit: here’s a longer explanation from the Globe & Mail

    Will the new 25-year amortization be applied to a 30- or 35-year mortgage I already have and will need to renew soon?

    Robert McLister, a mortgage broker and editor of the Canadian Mortgage Trends blog, said the new rules apply only to new government-insured mortgages after July 9. Existing mortgages with longer amortizations can be renewed as usual. However, those who increase their loan amount on renewal will have to amortize over 25 years.

  13. From today’s Calgary Herald:

    Ann-Marie Lurie, senior economist with CREB:

    “So you would expect to see some of that sales demand cool,” she said. “We’ve had really strong sales demand this year. So even if it’s cooling, it’s not going to be a total reversal of what we’ve seen. It will impact demand as you’re pricing some people out of the market.

    “Another thing you’ll see is what people can afford will also change. We can expect this to have some sort of dampening impact on price growth as well. The single-family market has been fairly tight and prices have actually been increasing a little higher than expectations. This will actually bring it more in line for what we did expect originally for the year.”

    Todd Hirsch, senior economist with ATB Financial

    The mortgage changes will have a “minimal” impact on the Calgary housing market, said Todd.

    “But it will be directed at that segment that the Bank of Canada is most worried about and that is probably first-time homebuyers who might be tempted to get in over their heads with too much mortgage debt,” said Hirsch. “So I don’t expect it to have a big, big negative impact but it will affect those buyers who perhaps have to wait a little bit longer to cobble together some down payment.”

    Ben Brunnen, chief economist with the Calgary Chamber of Commerce

    In Calgary, the impact of the mortgage rules could be that people wanting to buy a home might look at a lower price point or they will increase their down payment to access a higher price point, said Ben

    “We’re fortunate to be in a position of growth and when changes that reduce access to financing come into play you want to be in a place where the growth is happening as opposed to an area of decline,” he said.

    “In Alberta right now, we’re also seeing relatively high confidence for consumers and relatively strong spending. So when we see those things, we need to make sure that consumers don’t over-leverage themselves in the event the economy declines globally.”

  14. Would anyone care to speculate on the effect the $1MM loan size cap will have on the Calgary luxury market that was performing so well just last month? How significant will this change be for the size of the luxury market?

    I would think there are fewer high-ratio mortgages above the $1MM mark, but that many potential entrants over the next few years (i.e. younger professionals, move-up buyers) will have to wait longer to accumulate the downpayment necessary to afford a conventional mortgage greater than $1MM.

  15. Anyone in the real estate / finance biz will be spinning this exactly as they are saying, that it will not do much damage. It will wiithout a doubt. what is this: ” or people will put down more downpayment”……..and just how will they do this?? only the BoC and banks can create money out of thin air…..LOL.

  16. Charles St-Arnaud, an economist at Nomura Securities International Inc.

    “We believe that these measures are coming too late and that the housing market and household debt are already over-stretched. Moreover, changes to the amortization period have the risk of providing a very powerful negative dynamic in a housing market that is already showing signs of slowing.”

    Phil Soper, the CEO of Royal LePage

    “I supported the previous moves but I’m disappointed with this particular set of changes. The market is clearly cooling on a national basis, and I’m concerned that what is essentially a Toronto problem is being attacked with a blunt instrument that’s going to hurt the housing market nationwide.”

    (source)

  17. How do you think the $1 million cap will affect the Calgary luxury market, which has been so strong lately?

  18. I am sure that this multi million dollar project that was already struggling will be toast. I would have been horrified if it went ahead before but even moreso now.
    http://www.therivercalgary.com/

    It wasnt selling well and I will assume with the markets rocking daily, low NG prices, dropping oil prices, slowing oil patch that the last thing on people’s minds are overpriced overhyped condos that will flood every June……lol

  19. Royal Bank analysis of the mortgage rule changes: click to download report

    Summary:

    The new rules announced by Finance Minister Flaherty today came as somewhat of a surprise given that Canada’s housing market was not demonstrating signs of overheating for the most part. We remain of the view that the market is in transition to a moderate and sustainable path. As is often the case when rules are changed, the new rules are likely to set off some kind of a stampede in the next few weeks of purchases’ looking to take advantage of the current terms.

    Past July 9, however, the new rules are likely to restrain homebuyer demand, particularly from first-time buyers. We would expect this restraint to accelerate the process of moderation in housing market activity; yet, we do not foresee any serious correction threatening the stability of the market. Canada’s housing market will continue to find support from an expanding economy and the growth in employment and household income that this will generate.

  20. Hi Aeturneus, I just noticed that several of your comments were caught in the spam filter but I’m not sure why… Sorry!

    Here’s a recent article in the Globe & Mail which answers your question regarding CMHC’s $1M cap: Flaherty’s million dollar mortgage change hits only 0.1% of buyers

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