The grumbling in the hall is that the latest action by the Feds will temper home prices. What they are referring to is Finance Minister Jim Flaherty’s four point move: to to reduce the maximum amortization period of a CMHC insured mortgage to 25 years from 30 years. The maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent. The availability of government-backed mortgages will be limited to homes with a purchase price of less than $1-million and the maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.
Many major banks economists have heralded forecasts that this latest move could reduce home prices by a further 3 to 6 percent, a forecast that may hold some weight in the major centers of Toronto and Vancouver, but not for the reasons cited. Some reports go as far as adding a disclosure that this only applies to the Toronto and Vancouver markets.
While we agree that the Vancouver and Toronto markets are set for a retraction (we’ve been waiting) it would not be due to any of the actions of Mr Flaherty. These major centers have been overheated for the past few years driven primarily by some heavy in-migration from Asia and India. Insiders reveal that officials have tightened down on the flow of new immigrants and this has has an immediate impact on the bidding wars that wealthy Asians have created (often amongst themselves) in Vancouver. I have some difficulty believing that a reduction in the amortization of CMHC loans has much to do with this retraction in Vancouver but the public and some media will speculate on the cause and effect. Calgary (Alberta and Saskatoon) is poised to buck the retraction that is predicted for Vancouver and Toronto because these regions (rich in resources) are set for a massive surge in new employment and in-migration that will fuel the local housing markets for several years.
In our practice we advise Buyers to obtain mortgages below the 25 year normal amortization period to save a tremendous amount of interest. Buy the perfect home – even pay more for a better home that will serve your family for a lifetime and mine your mortgage internally for massive savings in interest. These savings are compounded after tax because the dollar you don’t need to spend on a mortgage payment is a dollar fifty that you don’t need to earn. The practise of placing a down payment of a minimum 25% is also prudent and ensures buyers don’t buy before they can actually afford to own.
In all, the four point measures introduced by the government to blow off some steam on the housing market relate to good sound financial planning for all Canadian households. These measures will guide new home-buyers to be more patient, a bit more prudent in their finances and not to overstep their ability to repay their debt if and when interest rates increase. When the current low interest rate regime loosens this should allow homeowners to afford the slight increases we expect in the future without a major disruption to their finances and they can continue to enjoy owning the homes they worked so hard to acquire. In the Calgary market we expect the resulting impact to be minor. In fact, the immediate impact may be an initial rush of fringe buyers and the long term impact merely a healthy restraint to the real estate market.