by Jonathan Ben Simon B.Eng–
International Relations Representative – Keren Gad Group
For the last 7 years, the Canadian federal government has been changing the law regarding personal mortgage loans. Its goal aims to prevent the real estate market of going out of control by limiting excessive debt to Canadian households, somewhat slowing down the market. According to lawmakers, nothing catastrophic is to be expected, but nothing miraculous either, respond the economists. Indeed, a slight slowdown seems to be appearing for several months now. In short, since the summer of 2012, Canada’s Finance Minister, Jim Flaherty, has changed the maximum amortization period for mortgages supported by the Canada Mortgage and Housing Corporation (CMHC) to 25 years. This reduces the amortization of the debt of five years, implying a higher monthly payment. The Minister has, in addition, pushed 20% down payment required without the need of mortgage insurance. These measures are considered by the market as drastic, but are they really
Firstly, these changes affect mainly first time homebuyers. Therefore, the impact of these new regulations is felt on a certain part of the market only. Moreover, the demographic change caused by the influx of immigration and the aging of the population tends to control vibrations of the real estate business. This causes a real estate rotation that rebalances supply and demand. Since older people need housing options better suited to their condition, newcomers seeking to establish themselves recover their homes. That being said, 2013 is expected to show more stability due to gradual slowdown in property prices. While some sources predict a 2% decline, nothing yet has been confirmed.
While we have seen the effects of legislation on buyers, let’s see the effects on owners. The latters are affected when refinancing their properties, whereas before they had the right to 85%, now they cannot get more than 75% to 80%. They lose, in a way, 5% in property refinancing value. Thus, the only survivors are borrowers who wish to renew their existing loan. However, the new laws still indirectly affect them as they are forced to follow the same reimbursement rules. Since July 9, the government no longer allows a reimbursement greater than 39% of annual revenues. This regulation is not limited to mortgages as it also includes personal debts. That is to say that credit cards, store credits and all other related debt could no longer be struck at once. The proportion of reimbursement must enroll in a slice of 45% of revenues. This measure seeks, it seems, to protect the economy from market fluctuations. Limitation of indebtedness, lower mortgages, lower refinancing and increased CMHC requirements aim at a balance that is difficult to measure yet. It is certain that the debt reduction is desirable, but it also limits investments. Finally, the wealthy are not forgotten by the new laws. Now the government will no longer insure houses worth more than a million dollars.
Here are roughly the changes to expect in 2013. Fortunately, mortgage rates appear to remain advantageous, which will somewhat benefit the residential construction projects needed to meet demographic needs.