The changes were meant to cool down overpriced housing markets, particularly in Vancouver and Toronto. In those two major Canadian markets, the inflation of housing costs has been an ongoing concern because so many homes are selling for more than a million dollars. However, earlier rule changes had already precluded homes over $1 million from mortgage insurance, so this latest set of guidelines will actually have minimal impact on the markets they were intended to fix. Instead, these changes will drive mortgage rates up over time and eliminate choice for the Canadian consumer as big banks take more control over the country’s lending.
Markets like Calgary will suffer most from the effects of these rule changes – the same markets that have already felt the pinch from the increased down payment measures introduced almost a year ago. Those changes on home purchases over $500,000 required a down payment of more than 5%. At the time of those changes, CIBC World Markets predicted that the increased down payment measures would affect Alberta the most, dropping new home sales in Calgary by 10% and Edmonton by 7%. Nationally, the country would only be affected by a mere 4%.
Sorry, Alberta, but the hits keep on coming. One of the new changes implemented requires borrowers to qualify at the benchmark rate, which is much higher than the contract rate on five-year fixed-rate mortgages. This will affect first-time homebuyers more than any other group, reducing their borrowing power by roughly 20% and potentially squeezing them out of the market altogether.
The provincial government in British Columbia has just decided to offer first-time buyers interest-free loans for their down payments in order to counter the effects of Mr. Morneau’s restrictions. Premier Christy Clark’s action should create more jobs through increased housing activity and spawn economic growth for the province.
That sounds like something Alberta could use. The past couple of years have been tough for Albertans, who have been working less overtime and have seen bonuses reduced or eliminated altogether. Those who have worked diligently to save enough funds for down payments are now being told that they no longer qualify for their dream home. Instead of a single-family detached for their growing family, they’re forced to keep renting, or perhaps settle for a condo they will quickly outgrow.
Because of the changes to the low-ratio mortgage rules, existing homeowners looking to refinance their properties are being told that the best rates available are no longer applicable to them, even if they have perfect credit and a strong income. This may deter people from upgrading and slow renovation activity. Overall housing demand will likely be reduced, and sales of new and resale homes will be lower than they would have been without these new rules.
The rule announcements have left monoline lenders scrambling to obtain investors for their non-insured mortgage portfolios. Many have found partners, but with lenders already cautious about the province of Alberta, the fear is that the underwriting on these refinance and rental properties will be far more stringent in our province without low-ratio insurance. Not to mention, all lending partners (banks and monolines) now have increased cost structures.
All of this will have a compounding negative effect on the economy. The anticipated slowdown in new home construction that is likely to occur due to the required stress test and higher lender capital costs will only compound the issue. Perhaps it would have been prudent to implement some form of regionalization for the rule changes.
On the bright side, Albertans are resilient. Regardless of the current state of the economy, most are of the opinion that things will get better and that the present situation is only temporary. An agreement made by OPEC and non-OPEC producers to curtail oil production, along with the new pipeline announcements, should help bring Alberta out of its slump. Add to that the rebuilding of Fort McMurray, and there is reason for optimism. Of course, the biggest hope of all is that maybe Mr. Morneau will see the error of his ways.
Amanda Roy is the executive director of the Alberta Mortgage Brokers Association. She’s been with the organization for more than six years and has a background in communications and journalism.
MBN
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