Canadian Home Buildersʹ Association. Federal Mortgage Regulations and Housing Markets Our File: P 3812

Transcription

1 Independent Real Estate Intelligence Memorandum to: John Kenward, Chief Operating Officer Canadian Home Buildersʹ Association From: Peter Norman, Senior Director Altus Group Economic Consulting Subject: Federal Mortgage Regulations and Housing Markets Our File: P 3812 This memo addresses potential effects of recent changes to federal mortgage Regulations on Canadian housing markets. 1. On June 21, 2012 the Department of Finance announced changes to regulations for federallybacked mortgage insurance. These changes took effect on July 9, The key elements of the June 2012 regulatory changes shortened the allowable amortization, tightened criteria for refinancing, tightened requirements for debt service ratios and placed a price cap on eligible properties. 2. In recent weeks and months, there are some signs that markets may be cooling. Examples of high frequency data being interpreted as housing market cooling include: In October, CMHC reported 204,100 housing starts (SAAR) in Canada down 9% from September, and fully 19% lower than their recent peak in April, According to the Canadian Real Estate Association s Home Price Index, the aggregate (6 market) composite index fell 0.2% in September relative to August. In terms of the six markets involved, the month over month price changes ranged from 0.5 in Vancouver Lower Mainland to +0.1 in Montreal. CREA reported that the number of sales through the MLS system in August and September were some 7.8% lower than the average for the first seven months of the year (although noted that some special factors were present). Research, Valuation & Advisory Cost Consulting & Project Management Realty Tax Consulting Geomatics Economics 33 Yonge Street, Suite 500, Toronto, ON M5E 1G4 Canada T F altusgroup.com

2 Page 2 According to Statistics Canada the number of residential building permits issued by Canadian municipalities in September fell 9.1% from August. Statistics Canada reported a 0.2% rise in the New Housing Price Index in August, relative to July. 3. A number of commentators have linked the apparent cooling of the market in recent months to the change in Mortgage regulations: CREA press release, October 15: New mortgage rules continue to keep a lid on national sales activity Royal LePage president Phil Soper quoted in the National Post October 3 rd : changes to mortgage regulations, which took effect on July 9, accelerated the correction Conference Board economist quoted in Macleans September 24 th : Canada s housing market appears to be cooling across the board in the face of tighter mortgage rules that affect many first time buyers of modest means 4. In our opinion, it is not unreasonable to equate changes in the mortgage regulations to reduced demand for housing and thus, ultimately, to reduced housing market strength. The regulations had the effect of eroding affordability, particularly for first time buyers. Reduced affordability has a direct effect on housing demand. The effect of changing the maximum amortization from 30 years to 25 years is that some 95,000 potential home buyers, (current renter households), who previously could qualify for a mortgage on a starter home, would no longer qualify. 5. It is instructive to put into context broad measures of housing market performance over the past several years in relation to the many changes in mortgage regulations Figure 5 shows that since 2001 there have been some 19 substantive changes to mortgage regulations in Canada announced on about 10 different occasions.

3 Page 3 Figure 1 illustrates that since 2005 there have been four loosening changes to mortgage regulations and another four tightening changes. The correlations between the various changes in regulations and a corresponding rise or fall in market activity or price performance is not immediately clear from the chart, however, there is a general upward influence on the market apparent coincident with the loosening changes and some dampening during the tightening changes. However, in as much as there has been an effect on the market, that effect tends to be short lived typically one or two quarters. Similar data is shown in Figure 2 for the Toronto market. At both the Canada and Toronto levels, the apparent market cooling can be seen in the final quarter of data. If the pattern persists that changes in regulations have a one or two quarter impact, this suggests that we can expect further cooling in the fourth quarter data (when it becomes available) and then some normalization thereafter. 6. While the recent tightening of mortgage regulations has had an impact on affordability, particularly among first time buyers, it is important to keep perspective on the magnitude of that impact across the whole market. The changes in regulations have a market impact only to the extent that buyers are directly affected by the regulations. According to the FIRM survey results, in late 2011 and early 2012 only about one quarter of those taking out new mortgages opted for amortizations beyond 25 years. (Figure 3). So some three quarters of buyers would not be affected by the restriction in the regulation. In addition, among those households taking out new mortgages and opting for longer amortizations, only about 20% did so because This was the only way I could qualify for a mortgage. Taken together, these two findings from the FIRM survey suggest that only about 5 6% of recent new mortgage customers were on the margin to the extent that they

4 Page 4 would be severely affected by the new regulations. Because this proportion is small, this is reason to believe that the overall market impacts of the mortgage regulations will be commensurately minor.

5 Page 5 Figure 1: Housing Markets and Mortgage Insurance Regulations, s Units High Ratio definition 25% to 20% Year-to-Year % Change Existing Home Sales 20.0% MLS Home Price Index* 15.0% 10.0% 5.0% Year Am Int Only 35 Yr Am 40 Yr Am Max 35 Yr Ams Min 5% DPmt Tighter Standards 20% down on Invest. Properties Max 30 Yr Am HELOC Max 25 Yr Am Price Cap GDS 0.0% -5.0% -10.0% -15.0% -20.0% * Composite, 5 boards, end of quarter values CREA, Homepriceindex.ca Figure 2: GTA Housing Markets and Mortgage Insurance Rules Resales 000s Units High Ratio definition 25% to 20% MLS Home Price Index* Q/Q % Change (Ann.) 30.0% 20.0% % Year Am Int Only 35 Yr Am 40 Yr Am Max 35 Yr Ams Min 5% DPmt Tighter Standards 20% down on Invest. Properties Max 30 Yr Am HELOC Max 25 Yr Am Price Cap GDS 0.0% -10.0% -20.0% -30.0% * Composite, end of quarter values TREB, CREA, Homepriceindex.ca

6 Page 6 Figure 3: Trends in Longer Amortizations (Greater than 25 Years) % of All Mortgage Holders % of all mortgage holders Those taking out new mortgages in each period Dec Dec Dec Mar st half nd half 2011 Q * small sample Source: The FIRM Residential Mortgage Survey Figure 4: Reasons Opted for Longer Amortizations (Greater than 25 years) % of Respondents with amortization period more than 25 years I wanted to improve my cash flow for other spending in the early years of my mortgage I am currently making regular payments above the required amounts for this amortization, but wanted flexibility to be able to reduce them in future if needed It allowed me to purchase a more expensive home than I otherwise could have afforded I wanted to refinance my mortgage to a larger amount, and this allowed me to do it while still keeping my regular payments reasonable This was the only way I could qualify for a mortgage I had to renew my mortgage at a higher interest rate Other 0 1 Base@ Source: The FIRM Residential Mortgage Survey

7 Page 7 Figure 5 Timeline: Key Changes to Canadian Mortgage Insurance Regulations Date Aspect Change Mar Downpayment Scotiabank launched no down payment mortgage with up to 5% cash back for FTBs, insured by GE Capital Mortgage Insurance for a limited time Mar Downpayment CMHC allowed FTBs to buy a house with no saving for a downpayment and allowed a downpayment to come from lender incentives or to be borrowed Feb Amortization CMHC started to offer homeowner mortgage loans amortized up to 30 years as part of a pilot project to improve access to home ownership and choice for Canadians Jun Payment CMHC's new interest-only homeowner product allowed lenders to provide borrowers with more flexibility in repayment options. Borrowers with a proven history of managing their credit could choose to make interest-only payments for up to the first 10 years of their mortgage Amortization CMHC's 30-year amortization offer became an ongoing product feature. In addition, CMHC introduced extended amortization periods of up to 35 years Late 2006 Amortization By late 2006, Genworth, AIG, and CMHC were all offering amortizations up to 40 years April High-ratio mortgage All mortgages with less than a 20% down payment were considered high-ratio mortgages that required high-ratio mortgage insurance. The 40 or so years before April 2007, the down payment requirement was 25%. Jun Effective Mid Feb. 16, 2010, Effective April. 19, 2010 Amortization Downpayment Borrowing standard Federal government tightened regulation for new mortgages by cutting the maximum amortization period to 35 years from 40 Required a minimum down payment of five per cent (whereas loans for 100 per cent of the price had been possible) Federal government now required that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter

8 Page 8 term (this initiative was introduced to help Canadians prepare for higher interest rates in the future) Jan. 17, 2011, Effective April. 18, 2011 Jun , Effective July 9, 2012 Refinancing Downpayment Amortization Refinancing Other borrowing Amortization Refinancing Lowered the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes (intended to help ensure home ownership is a more effective way to save) Required a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owneroccupied properties purchased for speculation Reduced the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent Lowered the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. Withdrew government insurance backing on lines of credit secured by homes, such as home equity lines of credit (HELOCs) Reduced the maximum amortization period to 25 years from 30 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent Lowered the maximum amount Canadians can borrow in refinancing their mortgages to 80 per cent from 85 per cent of the value of their homes Debt service ratios Limited the GDS to 39% and TDS to 44% Maximum price Limited the maximum price for an insured mortgage to below $1 million