Longer amortizations seen helping a 'sliver' of mortgage market

Canada’s decision to allow first-time buyers to take out mortgages with 30-year amortization periods on new builds will only affect “a sliver” of the country’s highly priced housing market, according to analysts.

“It’s not a needle-mover; it’s not a game-changer,” Ryan Berlin, senior economist at Vancouver-based real estate firm Rennie, said in a phone interview. “The first-time home buyer segment of the market is really small, and then the presale — the new-home segment of the market — is also small.”

The relaxation of Canada’s mortgage rules — announced Thursday by Finance Minister Chrystia Freeland to ease the country’s housing affordability problems — may increase the attainable purchase price for first-time buyers by roughly 6%, according to estimates from Berlin and his colleagues. However, new homes are often relatively more expensive and are subject to a 5% goods and services tax, which would offset most of the policy’s benefit, he added.

Still, the policy stands to affect builders’ approach to new construction, Berlin said.

“Certain developers may see the biggest impact in a positive way,” he said. If they’re selling new homes geared toward first-time buyers, such as smaller or transit-oriented units, first-time buying “may be funneled into those types of projects.”

First-time buyers make up less than half of transactions, with their share falling in favor of investors and move-up buyers, while insured mortgages — the kind covered by the new policy — have fallen to about 15% of new activity, Bank of Montreal senior economist Robert Kavcic wrote in a note.

Buyer power could increase by about 8%, assuming a 5% mortgage rate with a fixed down payment, in the relevant “sliver” of the market, Kavcic added.

“This could shift some incremental activity towards new builds among first-time buyers — until prices adjust — but the overall market impact should be limited,” he said. “And that’s a good thing, as juicing demand is rarely the right prescription for a market already struggling with excess demand.”

CMP

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