The CMHC has changed the rules to force Canadians to take on less debt. Here’s why the government’s intervention in the real estate market is a good thing.
Canadians take on too much debt—plain and simple. The downtown core is full of twentysomethings who think nothing of paying for $250 bottle service at nightclubs with their Visa and then carrying the balance. We can’t stop people from overspending, but when it comes to mortgages, we can force Canadians to take on less debt. That’s just what the federal government did two weeks ago when it made a number of changes to national mortgage rules, which take effect on July 9.
Spurred on by fear of an over heated real-estate market, a condo bubble in Toronto, and rising personal-debt loads, the Canadian Mortgage and Housing Corporation (CMHC) made four key changes, including lowering the amount homeowners can borrow when they’re refinancing their property. But one sticks out from the rest: The maximum amortization period (the length of time you have to pay off your loan) has been reduced from 30 to 25 years. Personally, I think it’s a step in the right direction, but considering that 40 per cent of new mortgages last year were for 30-year terms, this is clearly going to affect the market.
Up until a few years ago, borrowers could have up to 40 years to pay off their mortgages. Now that it’s been cut to a maximum of 25 years, loans must be paid off faster, which means monthly payments will be higher. For example, if you purchase an entry-level $300,000 condo with a 10 per cent down payment, your monthly payment will now rise from $1,178.09 to $1,322.23. This should help weed out some of the buyers at the very bottom of the property ladder, who arguably shouldn’t be buying properties in the first place. If you can afford $1,178.09 per month, but not $1,322.23, then perhaps you haven’t left yourself enough of a buffer—perhaps you should hold off on buying and save a little more until you’re not so price-sensitive. On the day the changes were announced, one of my buyers called me and simply said, “I’m out.”
The problem, in my experience, is that far too many young people are buying condos when they can barely afford it. I get calls from would-be buyers who say, “I have $15,000, and I want to buy a condo.” But once you pay your land transfer tax, legal fees, moving expenses, and so on, you’ll be lucky to have anything left to spend on the actual condo. Buying a condo with a five per cent down payment is not ideal, but it’s especially unwise when you don’t have a penny to your name outside of that five per cent or, even worse, if you’ve borrowed that down-payment money. The new rules only affect CMHC-insured mortgages—those with less than a 20 per cent down payment—so the high end of market likely won’t be affected. And while there are many buyers in the middle tier who have less than a 20 per cent down payment, they’re not quite as price-sensitive as first-time buyers.
Will these new rules cool the market? That’s the hope of the people in charge. Dropping the amortization period by five years is essentially the same as raising interest rates a full 100 basis points (or one per cent). You could conclude that this would slow down new condo development, but I doubt that will be the case. I think Toronto will be saturated with cheap condos in years to come, and it’s all the more reason for buyers to focus on the neighbourhood and the building, rather than simply shooting for the lowest price per square foot.
We’re moving from a seller’s market into a more balanced market, but I don’t think these changes will lead to a pure buyer’s market any time soon. If I were asked to predict the future, I’d say we’re going to be in a balanced market for the rest of 2012, and next year will be largely shaped by global economic forces. It’s nice to see our government take steps to rein in debt and, as a result, it’s the first time in recent memory that it’s been both a good time for buyers and sellers.
David Fleming is a Realtor with Bosley Real Estate in Toronto, and author of the best known real estate website in the city: www.torontorealtyblog.com. A constant thorn in the side of condominium developers, David’s sarcastic, opinionated, outlandish thoughts can be read daily, although for some people, that’s far too often.