LIBERALS MOVE TO COOL HOUSING RISK
The governing political party has changed, but the general housing message is still the same — reducing Ottawa’s exposure to the housing market.
On Friday, Liberal Finance Minister Bill Morneau picked u- p where the late Jim Fla herty left off by once again t- ightening the rules on mort gage lending, this time dropping the hammer on the thing the real estate industry has long dreaded — an increase in the minimum downpayment.
T- he minimum down pay ment f or a governmentbacked loan will jump from five per cent to 10 per cent for the portion of a house price above $ 500,000. That means, for example, that a $ 750,000 h- ome that would have re q- uired a $ 37,500 down pay ment before, will, as of Feb, 15, 2016, require a $50,000 down payment.
The progressive nature o- f the change to down pay ments, with only the portion of the price above $ 500,000 being affected, made t he change far more palatable. That $ 750,000 home would only require an extra $ 12,500 down, effectively increasing t- he percentage of downpayment needed from five per cent to 6.7 per cent.
This was one of a trio of key changes separately announced i- n Ottawa, all aimed at re d-ucing the risk in the market place. Coincidentally — or, likely not — the Office of the Superintendent of Financial I nstitutions also said it will have new provisions for banks to hold additional capital against their mortgage loans.
S- eparately, Canada Mort gage and Housing Corp. said Friday it will increase the fees i-t charges for National Hous ing Act Mortgage- Backed Securities and Canada Mortgage B- onds, a move it said was de s- igned to encourage develop m- ent of private market fund ing alternatives.
With estimates that about 57 per cent of the total outstanding stock of residential mortgage credit of $1.3 trillion is insured, the message from Ottawa is clear: It may not want out of the housing market, but it would like consumers and investors to take on more of the risk.
“Since the l ast tightening in 2- 012, there has been growing con cern about the potential risks that are p resent,” said Craig Alexander, vicepresident of economic analysis at C.D. Howe Institute. “It’s good that all (these measures) are coordinated.”
The risk in further cooling the market is that the application of national policy, chiefly aimed at Toronto and Vancouver where the average detached house sells for about $ 1 million and $ 1.6 million respectively, will affect regions like the Prairies where home prices are mostly flat.
In Calgary, November sales were 20 per cent below the 10-year average and, while the average sale price of a home is only off five per cent from a year ago, the real estate industry is worried the worst is yet to come.
Ben-jamin Tal, deputy chief econo mist with CIBC says, the change in the down payment rules will impact 10 per cent of new home sales in the o-ilpatch. “All the factors together, in cluding changes from OSFI and CMHC, add up to something,” Tal said. “Yo-u do have some unintended con sequences, Calgary is not a market that needs any cooling. The market is going to go down regardless and this is an extra push.”
N-evertheless, the real estate indus try has been bracing for a change in r-ules and reacted with very little out rage once it became reality. Re/Max, o-ne of the largest firms in the coun try, even published a poll this week that maintained that more than 66 per cent of Canadians agree that 10 per cent or more is a good level for a down payment on a home. It said the impact of a 10- per- cent- down rule would be minimal outside of Toronto and Vancouver.
“As a business person, if I’m just a selfish mortgage seller, I’m happy,” said Rob McLister, the founder of r-atespy.com. “It’s much less impact f- ul that what we would have ex pected.”
N-ext up could be the banks, as Ot tawa continues its quest to lower its risk to the housing market. The most popular scheme is the idea of a deductible the banks would have to eat in the event a loan fails.
CMHC’s chief executive Ev-an Sid d-all has been one of the leading pro ponents of the bank’s taking on their share of risk.
“Good insurance practice includes skin in the game by the insured to align behaviour and incentives and avoid moral hazard. As I’ve said, we are exploring ways to share these risks ( and profits and losses) more equitably in the financial system,” he said in a speech last month.
Ottawa appears to be far from done, when it comes to reducing its risk to the housing market.