Thursday, November 22, 2012

Dunning: Mortgage Rules (Round 4) Were Overkill

“...The changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.”

That’s the conclusion from economist Will Dunning in CAAMP’s just-released State of the Residential Mortgage Market report. (Link)

Dunning says his research suggests the Finance Department has created “a policy-induced housing market downturn” that could reinforce existing weakness.

He calculates that the most recent (July 2012) rule changes will knock 11% of potential high-ratio homebuyers out of the market—that is, until they can come up with more net income or a bigger down payment.

He lays out the following arguments:

Jobs underpin the market…

“Job creation is the key driver of housing demand” writes Dunning.

“The ‘housing wealth’ effect (the increased confidence, and willingness to spend and invest, that results from rising house prices) is the single most important driver of job creation”

What’s more, in the prior five years, 18% of job creation in Canada has originated from housing and mortgage activity.

If mortgage rule tightening drives down home prices, job creation will suffer and it could trigger a negative “feedback” loop between the housing market and the economy.

Price risk…

Dunning writes: “Experience around the world has shown that once house prices start to fall, the outcome is unpredictable, and can turn into a downward spiral that wreaks substantial economic damage.”

He adds: “It can happen that the loss of jobs affects housing demand, leading to further price drops and a vicious downward spiral.”

There is growing evidence to suggest that the combined mortgage rule changes of the past four years may now be “significant enough to substantially reduce housing activity.”

What’s happened so far…

The government has handed down four sets of insured mortgage restrictions since July 2008. Dunning summarizes them in the list below:

(Source: Will Dunning)

He says the cumulative effect of these four sets of changes “have resulted in a massive contraction in credit availability.”

From August to October, home sales were 7.8% lower than the prior year.

Some analysts downplay the effects of past mortgage rule changes, pointing to the subsequent sales rebounds that took place.

Dunning notes that those rebounds coincided with falling mortgage rates. “It appears that the movements of mortgage rates were more important than the changes in the mortgage insurance criteria,” he says.

The effects…

“16.9% of high-ratio mortgages that were funded in 2010 could not have been funded under the revised criteria.”

“…The final set of changes that was announced in June 2012 and took effect in July will have had the most significant consequences, accounting for about 65% of the impact (11.0% out of 16.9%).”

Time for young buyers to save up…

“…Simulations indicate that on average (based on 2010 real mortgage data), the additional down payment required is about $25,000, 7% of the purchase price." That's what it takes to offset the mortgage rule effect.

"If we assume that these households can devote 10% of their pre-tax incomes to enlarging their down payments, on average it will take 3.5 years to re-qualify – and this assumes that house prices and interest rates do not increase.

(10% may be optimistic. Doug Porter recently estimated that the median family saves only 4%, or $2,800 a year.)

What happens next…

55% of buyers need high-ratio mortgages, according to Maritz. “If 16.9% of potential high ratio buyers are removed from the market, this would reduce total home sales by about 9%,” Dunning states.

“…It will become more difficult for people who want to move-up in the market to sell their current home. In consequence, over time, we should expect to see reduced activity in upper segments of the market.”

“…Declines in activity will be partly (and gradually) mitigated, as some of the affected potential buyers save additional down payments and can return to the housing market.”

“…It now appears that the 2010 changes had a lasting negative effect (on home sales).”

“…the negative effects on housing activity will be quite prolonged…the damage is not yet fully developed.”

Was it necessary?

“The average resale house price in Canada had been essentially flat since early 2011,” Dunning says. On top of that we faced (and still face) material risks from the U.S., Europe and from domestic budget tightening.

“There was no need to further cool the housing market,” he concludes.


Stricter mortgage rules will be a drag on demand until the market has time to adjust. Let's just hope the new rules aren't coupled with an economic slowdown or a natural cyclical home price correction. In that case, the latest rule changes could prove to be very bad timing.

Of course, low rates could always save the day once again—or delay an inevitable correction if you want to look at it that way. We could also see buyers get off the sidelines and purchase on dips—i.e., buy if home prices drop 10% or so. Both of those factors could pad a fall, at least somewhat.

Tuesday, November 20, 2012

New guidelines coming for mortgage insurers


The Globe and Mail

Published Monday, Nov. 19 2012, 6:30 AM EST

Canada’s financial regulator will release new guidelines for mortgage insurers early next year, including the government’s Canada Mortgage and Housing Corp. – but they won’t drag down the housing market as much as the guidelines for banks have, says the country’s banking watchdog.

The Office of the Superintendent of Financial Institutions will outline what standards it expects the country’s three mortgage insurers to follow when they underwrite a policy on a home. Ottawa has just recently given OSFI the job of overseeing CMHC, a federal Crown corporation that is the largest player in the industry; it was already regulating two private-sector rivals, Genworth MI Canada and Canada Guaranty.

The mortgage guidelines that OSFI released for banks this summer are believed to have played a role in the decline in national home sales for the second half of this year. The new rules pushed lenders to be more cautious in areas such as background and credit checks on borrowers, document verification, and appraisals. The biggest impact is believed to have come from one particular rule that capped the amount that any individual can borrow on a home equity line of credit at 65 per cent of the home’s value.

“I would not expect the same impact” from the rules that OSFI intends to create for mortgage insurers in the new year, Julie Dickson, the regulator’s superintendent, said in an interview.

The final guidelines for banks came out in June. That was shortly before Finance Minister Jim Flaherty tightened up mortgage insurance rules, including cutting the maximum length of insured mortgages to 25 years, in an effort to stem the growth of consumer debt levels and house prices.

While Mr. Flaherty is focused on the risks to the broader economy, Ms. Dickson is responsible for ensuring that the country’s banks, insurers and mortgage insurers remain financially sound. Unlike Mr. Flaherty’s changes, the guidelines that she will release are more likely to focus on the things that mortgage insurers must do behind the scenes to assure that they are not taking on too much risk when they insure homeowners’ mortgages.

“We are in a market where there is a lot of growth in household debt, some froth, and I think whenever you see that you have to act early and try to ensure that people aren’t forgetting sound practices,” Ms. Dickson said.

“Having buttoned-down mortgage underwriting policies does slow things down a bit, so that if mortgages are presented that are outside the policy, [the financial institution] is going to have to take more time to consider it; that does have an impact.”

OSFI is taking action in this area after the Financial Stability Board, an international body made up of regulators and banking experts around the world, suggested that all countries review their rules for banks and mortgage insurers.

The board is chaired by Bank of Canada governor Mark Carney. It suggested, among other things, that mortgage insurers be regulated. Mr. Flaherty moved to put CMHC, which dominates the mortgage insurance business in Canada, under OSFI’s authority earlier this year.

Friday, November 09, 2012

The hidden costs of home ownership

By Gail Johnson Read Here

Kelly Gardiner In his three decades as a real-estate agent in North Vancouver, B.C., Kelly Gardiner has seen a lot of different reactions from people buying a house for the first time. Usually, they're excited, nervous and overwhelmed. But there's another feeling that sometimes pops up -- utter shock -- not from the purchase itself, but because of all the associated costs people never even thought of.

"For people who haven't moved that often, a lot of expenses can come as a surprise (money mistakes)," Gardiner says. "Or they're so focused on just signing the papers that they never stop to think about everything that's involved in owning a home and moving into one."

So, if owning property is a new endeavour, here are some of the hidden costs to budget for before you close the deal:

Legal fees

Fees and disbursements usually cost around $1,000. You can hire a lawyer or a notary, but it's best to deal with someone who specializes in real-estate transactions.

Property transfer tax

This land-registration tax must be paid when you register changes to a certificate of title at the land title office. It varies from province to province. In B.C., for example, the tax is 1 per cent on the first $200,000 and 2 per cent on the balance.

Provincial sales tax

Again, this amount varies across the country, but is charged on new condos, townhouses and homes. For example, new homes or properties that have undergone a substantial renovation, are subject to 13 per cent HST in Ontario. For a home with a purchase price of $310,000, you'll be required to pay $40,300 in HST. Ouch! But, depending on the purchase price of your home, buyers may be eligible for a new home rebate, which will help to alleviate some, or all, of the HST sticker shock.

Home inspection

You can spend anywhere from approximately $200 to close to $1,000 for a qualified inspector to see what's lurking behind the cosmetic upgrades. Find an inspector with a solid reputation and have them spell out exactly what services they'll provide. (ie: some inspectors offer a checklist; others take photos and provide a detailed report). It's best not to skimp on this one.

Land survey

Most mortgage lenders will require a survey of the property done by an accredited land surveyor to determine whether the home sits within its specified legal boundaries and complies with local bylaws. This usually costs about $500 but can be much more in complicated cases.

Closing adjustments

This cost includes any adjustments between you and the seller for things like property taxes and utilities that were paid in advance. Your lawyer or notary can calculate these charges.

Mortgage insurance

If your mortgage is more than 75 per cent of the home's selling price, it's considered high-ratio and you must buy insurance from the Canada Mortgage and Housing Corporation. The amount is calculated based on the ratio of mortgage to home value.

Property taxes

If you've never owned your own place before, you've never had the joy of paying this monthly expense. This is on top of monthly strata fees if you're in a condo.


At its most basic, there's the cost of hiring a company to haul all of your worldly possessions to your new digs; then there's the potential expense of having someone pack all of your things for you too. Costs vary widely and depend on how far you're going.

Ask in advance whether the movers charge for travel time to get to you in the first place.

If you have to be out of your old place before you can move into your new place, you'll have storage costs as well.


These may or may not come with the home, so you may find yourself shopping for a washer and dryer or even a fridge, oven and dishwasher.

Window coverings

Again, these aren't necessarily automatically included. Be clear about this in your offer so you're not left doing an emergency run for blinds or curtains.

Connection fees

Telephone, cable, Internet and alarm-system companies will ding you a connection fee. Then there are charges to set up heat, water, gas and electricity. However, some of these charges may be negotiable if you're staying with the same service provider. It never hurts to ask what the company can do to retain you as a loyal customer.


As a proud new homeowner, you may need to invest in items like a lawn mower, sprinklers, garden tools, hoses, shovels, a ladder, a freezer, basic tools and the like. It all adds up. Best to start saving now.

Thursday, November 08, 2012

Comments on CIBC's "no US-style crash for Canadian housing" report: Part 2

Click here

Comments on CIBC's "no US-style crash for Canadian housing" report Part 1

I feel compelled to give my thoughts on a highly-publicized CIBC report out last week titled, “Should we worry about a US-style housing meltdown?”, written by Ben Tal. The full report can be read here.