15 May

Soft landing still likely


Posted by: Deborah Fehr

Soft landing still likely, conference told

Kiki Sauriol-RoodeRecently Genworth Canada hosted a half-day seminar for Realtors and mortgage industry professionals. The seminar was held in Mississauga and broadcast live across Canada via webcast. Craig Alexander, chief economist at TD Group, delivered the keynote speech about the current state of Canada’s economy and real estate market. His presentation was followed by a review of Genworth Canada’s annual Homeownership Study – a survey that looks at homebuyer trends and behaviour and financial fitness levels of Canadians.

The results of the survey were discussed in a panel discussion featuring Phil Soper, president and CEO of Royal LePage, Stuart Levings, COO of Genworth Canada, Henrietta Ross, CEO of Canadian Association of Credit Couselling Services and David McDonald of Environics Research Group. Following this discussion, Paul Belanger, co-chair of the Financial Services Regulatory Group at Blakes LLP and Mark Tamburro of Get A Better Mortgage Inc., deliberated over a number of probing regulatory issues.

The following provides a summary of key take-aways from the presentations and panel discussions:

* Canada has out-performed the U.S. during the economic recovery.

* The Canadian economy is expected to deliver moderate economic growth in 2013 and 2014.

* A soft landing is expected in Canadian real estate.  Home sales have fallen in response to the tightening of mortgage insurance rules and slower economic growth, but there has not been a price correction (outside of Vancouver). This reflects the fact that listings have declined in tandem with sales.  The result is balanced market conditions in most Canadian cities.

* The effects of the recent tightening of mortgage insurance rules will abate with time. There is no catalyst for a major correction in real estate, as Canada’s labour market will remain healthy and interest rates will remain low.

* Consumers have reduced their willingness to take on additional debt. This will constrain household spending, but it is a healthy outcome and spending will likely continue to advance at roughly the pace of income growth.

* TD Bank does not expect interest rates to rise until late 2014 to early 2015. The exception would be if the housing market rebounds and it leads to acceleration in debt growth, in which case the Bank of Canada could be forced to raise interest rates sooner or the government could tighten mortgage lending rules further.  An option that does not get attention, but could be prudent, is a change in the qualifying interest rate.

* People are putting more money down, but people are also buying smaller homes. Both are indications that people are opting for more affordable mortgages.

* There is still a need for increased financial literacy among Canadians (27 per cent do not even know what their credit rating is).

* The Canadian government was concerned with a rising debt-to-income ratio and changes to mortgage regulations in the past few years were a quick way to address the issue.

* This is likely not the end of changes in the mortgage industry; much depends on how changes made to date continue to affect the industry.

Kiki Sauriol-Roode is VP, strategic alliances for Genworth Canada. To view a replay of the live webcast of the seminar or find out more about Homeownership Education Week visit www.genworth.ca.


7 May

Not all new rules are old rules


Posted by: Deborah Fehr

May 04, 2013

Not All New Rules Are Old Rules

mortgage-rules-2012In the last four and a half years, federal regulators have instituted more than two dozen mortgage-related policies and regulations. It’s a well-intended attempt to engineer a market correction (the proverbial “soft landing”) and add stability to the housing market.

There’s been much debate over the extent of recent rule tightening. But only time can tell if Ottawa’s policy-induced downturn takes hold, and if it was the best course for the economy.

Despite that, many armchair analysts have already taken their position without seeing the outcome. Some of these folks have downplayed the array of recent mortgage restrictions, arguing that they are simply old rules made new again.

Market share analysisThat is partly true for things like amortization length, down payment size and debt service ratios.

But many of the new mortgage rules actually are new, or they haven’t applied for over a decade. Here are a few examples:

  • Mandatory qualification rates on all terms less than five years
    • Someone getting a 4-year fixed, for example, must now prove he/she can pay an interest rate of 5.14%. If a 5-year term is chosen instead, that bar drops to ~2.89%.
  • Stiffer documentation requirements—especially for self-employed borrowers
  • Various securitization-related restrictions
  • 80% loan-to-valuerefinances
    • 90% LTV refis with unrestricted use of funds were introduced in 2001. Prior to that, homeowners could use their home equity “for housing-related purposes such as renovations,” says CMHC.
  • Stricter treatment of rental income
    • Generally speaking, borrowers must now use less of their rental income to qualify for a mortgage.
  • Stricter credit score requirements (with fewer common sense exceptions)

Some of the above rules are clearly sensible and necessary, but all of them are brand new or “newish.” For that reason, it is inaccurate to characterize recent policy tightening as merely bringing us back to the way things used to be.

(As a side note, some forget that we used to have 35-year amortizations for first-time buyers in the 70s, a higher frequency of second mortgages behind conventional first mortgages, and no price ceilings on low down payment mortgages.

In any case, each of the above new regulations have combined with re-instated debt ratio, down payment amortization, rental, and HELOC rules to slow the market even further. Hopefully Ottawa is content to see how real estate and the economy respond before adding more pages to its rulebook.

Rob McLister, CMT