Tighter mortgage rules would have far reaching consequences for economy: CREA
The Canadian Real Estate Association (CREA) issued a “call to action” this week to more than 100,000 members urging them to write their Member of Parliament (MP) to “explain the negative impact additional mortgage financing rule changes would have on home buyers, home owners and the economy.”
In the included form letter that CREA is asking members to sign and send to their MP, the mortgage rule changes that took effect earlier this year were characterized as “measured and balanced.” The author argues that those changes have had the desired effect and warns that a further tightening of the rules could destabilize Canadian housing markets and the economy.
From CREA’s letter.
“Additional changes to mortgage financing rules would raise the barrier to homeownership excessively and destabilize housing markets and the economy. In particular, we are concerned about the negative impact modifications to the allowable amortization period or minimum down payment requirements would have. These changes would create affordability problems, especially for first-time buyers. First-time buyers are the first link in a chain reaction of real estate activity. They allow existing home owners to change properties or rent. Creating burdensome barriers for first-time buyers will seriously impact the rest of the market, including retirees looking to downsize.
Further tightening of mortgage rules would have other far reaching consequences for the economy. It risks causing a home price correction, a drop in the net worth of Canadian households, lowered economic growth and reduced tax revenues. Consumer confidence would be damaged, labour mobility would be impeded, and unemployment would stay elevated.”
I’m always happy to answer your Saskatoon real estate questions. All of my contact info is here. Please feel free to call or email.
Our Saskatoon home search tool offers MLS® listings represented by all real estate brands, presented with more detail than you’ll find anywhere else. Check it out here.
Norm Fisher
Royal LePage Saskatoon Real Estate
26 comments so far. We'd love to hear your thoughts.
January 5th, 2011 at 1:25 PM
“Further tightening of mortgage rules would have other far reaching consequences for the economy. It risks causing a home price correction”
Oh no!
Seriously though, how do they think families afforded housing for multiple decades when the downpayment requirements were significantly higher (25%) and the amorization periods were significantly longer? The housing market was stable for for the 60+ years prior to 2006 when the maximum allowable amortization CMHC would insure was 25 or 30 years, but my goodness, if we go back to that, the whole thing will pop. But it’s *not* a bubble!
I find it amusing that any time the government loosens mortgage standards, it’s a good thing and is a sign of the free market, but when they tighten them in an effort to return to more historically “stable” standards, the warning that all hell is going to break loose ensues.
I am sure others may feel differently.
Thanks for this post, Norm.
January 5th, 2011 at 1:45 PM
There seems to be two schools of thought right now. Depending on who you talk to, the Canadian housing market is either stable (CREA) or it’s in for a rough ride. Does it not make sense that these kinds of changes, at this particular time could either destabilize the market, or destabilize it further?
I tend to agree that 25 year amortizations have serves us well over the long term but maybe it’s prudent to let the first change run its course and make further adjustments when we start to see greater improvement in the economy.
January 5th, 2011 at 9:56 PM
”There seems to be two schools of thought right now. Depending on who you talk to, the Canadian housing market is either stable (CREA) or it’s in for a rough ride.”
Norm, that’s exactly my point! If the housing market is so stable and based on historical measures of affordability, why would returning to pre-2006 lending standards destabilize it? The CREA cannot have it both ways. Either the housing market is stable, or it isn’t.
‘Does it not make sense that these kinds of changes, at this particular time could either destabilize the market, or destabilize it further?”
It absolutely makes sense! It’s the hypocrisy of this that gets me. How did we get into this (oh-so-stable) situation in the first place? Well, both you and I know the answer to that one. It’s also obvious that the author(s) of this report understand and appreciate the role that excess credit had created in housing and the broader economy post-2006, as they’re warning of severe repercussions if it is removed, and lending standards return to more historically stable ones. Why weren’t they saying anything when the excess credit was flowing in, creating the “problem situation” we have today? Well, they weren’t saying anything, obviously, because they were profiting financially from it.
This is what I see the report saying (in my own words, obviously):
“We have repeatedly maintained that the state of Canadian real estate is sustainable and based on fundamental and historical measures of affordability. We ask, however, that you not re-institute the 25 or 30 year amortization that had been maximum allowable amortization CMHC would insure for the 60+ years prior to 2006, or there may be severe consequences for the Canadian economy.
We therefore ask that you let the air out of this ________ (insert your own word here), slowly… as it’s quite precarious… but completely sustainable based on fundamentals, as we have previously maintained. Thank you.”
Please do understand that none of this rant is directed personally toward yourself. Your association, however, needs a good look in the mirror, IMHO.
January 5th, 2011 at 10:40 PM
“Please do understand that none of this rant is directed personally toward yourself. Your association, however, needs a good look in the mirror, IMHO.”
Damn you Jennifer!
Lol.
Hey, I have always said, “We shouldn’t expect member organizations to say anything other than what they perceive to be in the best interests of their members.” (or something like that) CREA is all about promoting the interests of REALTORS as the name suggests.
You seem to be arguing that it’s high time that CREA got caught in their own bullshit, consequences be damned. I see the allure of that position, but for the purpose of this discussion, let’s talk about what’s best for the economy, right now, while it’s hanging by a friggin’ string.
I’m simply asking, “Even if you buy the best case scenario that the markets are stable under the current conditions, doesn’t it make sense that changing the rules now runs the risk of destabilizing them?” We know that there’s going be some additional stress when rates begin to creep up more. We’ve got a long delicate walk ahead of us before things are fixed and housing isn’t running off the charts right now, so why tip over the apple cart?
I guess what I’m saying is that I think all of the “stable” talk is definitely on the optimistic side and I’m scared that more change, this fast, could completely derail us. I’d prefer not to go that way just so we can say, “told you so.”
January 5th, 2011 at 11:12 PM
The real Call To Action should be to get housing costs down as low as possible.
What is going to happen to our economy as interest rates rise? We are going to see an entire generation of spending power removed from the economy as families struggle with just paying their grossly inflated mortgages. After their mortgage payment, utilities, property Tax and miscellaneous house expenses, they will not have any or very little left over income to save for retirement, save for their children’s education, to invest, or most importantly, to spend in the retail sector to help drive our economy. This generation will be expected to support the coming wave of baby boomers who will be putting a huge financial burden on the Health Care system and Canada pension.
This is what happens to an economy that should be booming due to it’s China trade and skyrocketing commodity prices but that also has sky high housing prices.
http://www.dailytelegraph.com.au/news/sunday-telegraph/retailers-cry-poor-as-sales-drop-sharply/story-e6frewt0-1225973252299
January 6th, 2011 at 10:20 AM
Norm, this memo from CREA is off the charts. It is just self-serving and selfish. What a manipulative piece of writing. It has targetted the fear trade in the most obvious way and threatens the government indirectly by suggesting that we will all suffer if any changes are made to the system and policies as they now stand.
Change is in the air because the system has been distorted by cheap interest rates and lax amortization periods that were only intended as short-term measures to boost our economy. The sugar high went to peoples heads though and the great majority in this country do NOT seem to fully understand the risks of buying homes at elevated prices due to low interest rate policies. Nor do they have a grasp on economic fundamentals, averages, debt ratios and all the related risks should any unforseen events crop up in the future. This includes a multitude of risks from overseas markets but more specifically risks to our economy from stresses out of the US.
We cannot be complacent about the very high levels of indebtedness anymore and we do need change to head off a looming crisis as the sugar high is wearing thin.
Norm, your industry needs to take it’s medicine now. What you advocate (and the fear is apparent) is that it is better to deliver the dosage after we are recovered!
What you fail to consider is that the risk to our overall economic health becomes progressively more precarious as time goes by and no policy changes are brought in.
The medicine is for the benefit of all. Realtors included.
January 6th, 2011 at 10:38 AM
Cam,
“It is just self-serving and selfish.”
I think that’s obvious to everyone but CREA but member organizations are typically “self-serving.” They’re set up to serve the interests of the members so that’s never been a big surprise to me and I’ve always been open and frank about that (that people should be wary of what member organizations have to say).
There have been substantial policy changes brought in less than nine months ago. I’m simply suggesting that the medicine might be more effective in measured doses.
I do understand how a stable economy and affordable house prices are of benefit to everyone, including Realtors.
January 6th, 2011 at 11:50 AM
In the event the ability of entry-level buyers is going to be tampered with again by the feds in 2011 then encouragement for those who can better afford to be in the market might help to keep the market somewhat buoyant.
The feds could finally allow capital gains tax and the recaptured capital cost allowance to be deferred when an income property is sold and the proceeds are reinvested in another income property within one year.
Its now time to hammer this home: http://www.crea.ca/public/federal_affairs/reinvest.htm
January 6th, 2011 at 12:45 PM
The less a household has to pay for shelter, the more it has remaining to consume and save for retirement. So, pretty much the exact opposite of the CREA. Not surprising, though. The FIRE economy (finance, insurance and real estate) has been sucking up the wealth of Canadians to the detriment of the real economy for years. Its time some true value-adding economic growth comes back to this country.
High real estate prices hinder economic growth by making it less affordable for industries to attract and retain employees. Canada’s global competitiveness is seriously undermined by its sky-high real estate prices.
Trying to keep real estate prices high is short-sighted and self-serving of CREA and damages the entire economy now and well into the future as people struggle to pay unprecedented mortgages to meet the basic need of shelter.
January 6th, 2011 at 1:42 PM
“You seem to be arguing that it’s high time that CREA got caught in their own bullshit, consequences be damned.”
I’m actually arguing no such thing. Although that position is quite alluring, no, I don’t want to see the economy crash to spite the CREA. I think you know better than that. That would be beyond foolish, and gratefully, I’m no fool.
I do get what you’re saying, and in fact I would heartily agree with you that past lending policies and too much credit have led us to this somewhat delicate economic situation. I’ve also argued against them for years, as I’m sure you would concur. Look back through your comments- all the time I was aguing against the stability of relaxing CMHC-insured lending standards, at no time have I “wished” the economy would crash, but could see where this might be heading (as have many others, of course).
All I’m saying is that the CREA cannot credibly maintain that Canadian RE is both inherently stable and yet so precarious that it is in danger of destabilizing the economy at the same time. I would also argue that they certainly shouldn’t be marketing this in a way that claims to be arguing for the best interest of first-time homebuyers, when it’s obvious that they are, as you admit, arguing for the benefit of their members. First-time homebuyers would have been much better served by having stable prices, unaffected by years of relaxed credit policies, in the first place.
January 6th, 2011 at 1:46 PM
Lara, the less that you spend on anything the more you have for other things. Good point though about high housing prices hurting the economy. Just look what falling prices are doing for the states.
January 6th, 2011 at 1:57 PM
Jen,
I’m thankful that I can still count on you to set me straight from time to time. I do know that you’re no fool.
January 6th, 2011 at 6:32 PM
Jen and Norm,
I’m a Realtor myself and have to say that Jen points very directly to the obvious fact that the state of housing prices is damaging the economy, including first time buyers and Realtors in the long term and the amount of credit accumulated up to date is surely unhealthy because of the “delicacy” it brought to the economy of which Jen wrote. But to me the crucial point in this interesting discussion is what Norm said about the “medicine might being more effective in measured doses.” I totally agree with this point. The only question is, how do we measure the dose if we don’t know how severe is the illness, whether it is a illness, or how will the system react. Let’s try a lower dosage first, before the side-effects kill us, don’t you think?
January 6th, 2011 at 7:46 PM
The feds have already administered a couple of doses of medicine. In 2008, they cut the length of mortgages from 40 years to 35. This past April, there was another dose. Comments from some of the bank CEO’s and Mark Carney suggest the first couple of doses were not enough and a third dose is coming. I will not be surprised to see a stronger dose than previous ones.
As for this memo, this reminds me of some of the Public Union tactics in the United States. As many Cities and States have lost revenue in the last few years, they are laying off workers. The Cities were basically telling the Unions if taxes can be raised then jobs won’t be cut. So these Public Unions took to the street and rallyed taxpayers to pay more in taxes so the Union sector could keep their jobs.
I’m not sure high taxes or high house prices are a good thing.
January 6th, 2011 at 8:04 PM
Don’t worry Norm, the Cons will only implement token tightening. They didn’t facilitate a huge credit bubble only to wear it on their faces. They might up the min down payment to 7% (easily covered by current cash-back schemes) OR lower the amortization period to 30 years. No way in hell they’ll implement 25 year and 20% down – NOT GONNA HAPPEN. The bankers (TD BMO), through media interviews, have forced the gov’ts hand to do something; but it will be minimal. The credit/asset bubble will be brought down by other factors.
High house prices are “good” for people who already own, and who can borrow against their home to invest in a business venture or, less ideally, goods and services – thereby spurring economic activity. However, it is bad for first time buyers as a huge amount of their income must go towards their mortgage, leaving less for consumption (and savings, investment, etc.). The negatives overshadow the positives as time goes on and more and more home owners are paying through the nose.
The government purposefully juiced housing prices to create the illusion of increased economic activity (the economy being the # 1 political issue). I say “illusion” because debt only changes the timing of consumption, and not the amount. Borrow and spend now – spend less later.
Doug, I find it very humourous that folks credit the government for “tightening” rules after they blew open the flood gates in June of ’06 by introducing 0/40 rules. Ten steps back and one forward seems to get them kudos!!
Finally, the bankers statements somewhat shocked me. They make out like bandits on long amort mortgages and HELOCs; so when they publicly say tighten up hard, you know the whole thing is breaking up!
January 7th, 2011 at 11:17 AM
Hi Norm,
How does it feel to pay dues to an organization that you openly admit spews complete BS, and acts solely in it’s own best interest with no consideration for the impact that it has on the citizens that support it?
Seriously. What a crock of crap. The Members ARE the organization Norm. Do something about it instead of shrugging your shoulders and saying ‘wells that’s just how it is’.
January 7th, 2011 at 1:20 PM
I’m not sure how the numbers breakdown elsewhere but in Saskatoon sales in ranges under $300,000 dropped 18 percent in 2010 while those in ranges above that number increased. I’m thinking that this decline is likely due to lending practice adjustments that occurred earlier this year.
I don’t propose to have the answers but I’ll admit that I am concerned. I support whatever tough medicine is required to fix it but I think some level of care is required to avoid a five-six year free fall like we’ve seen in the US.
Jack,
You’re sweet, but it’s only right to let me do the all of the worrying about how I feel. I’ll extend you the same courtesy.
January 7th, 2011 at 3:10 PM
RE.: Jack
Norm, I appreciate your fair, reasonable and thoughtful points expressed on this blog. I appreciate your concern that any potential “cure” being administered has to be practical given the perceived health of the market. I think a return to more traditional lending ratios will simply bring forward in time the market reaction that what ultimately happen when we see more balanced interest rates [We all know a BOC rate of 1% and a Prime Rate of 3% is approximately 200 basis points below their traditional balanced levels, assuming an inflation rate of 2%].
I don’t think further property appreciation in the short term will be a good thing because, I believe, given income levels and projected future income growth, current house price levels are beyond what is supportable when we do return to balanced interest rates. Many markets in Canada have declining sales in the last 4-6 months with property appreciation. This is largely due to the low level interest rates but, I suspect, predominately because of the ability for the first time buyer market (and even likely some move up buyers) to put in minimal downpayments with long term amortizations. Taking the marginal buyer out of the market by policy (increasing the minimum downpayment and shortening the amortization maximum) will certainly affect the market but, IMHO, better now, to impart some of the impact now, then when rates go up, over a period of time, the 200 basis points plus and some of these poor buyers (and maybe a few move up buyers) are taken out of the market because they can’t afford the deal they bought.
However, we can debate that, and I think your point, once again is fair.
What isn’t so fair is Jack’s shot that you are just shrugging your shoulders. I think it is very remarkable that you posted the CREA “call to action” notice on your blog in the first place. You didn’t just shrug your shoulders, you let your readers know what was being proposed and welcomed a thoughtful discussion. Bravo. Enjoy your blog and wish you continued success.
January 7th, 2011 at 7:41 PM
Hi RAH,
You make an excellent point with respect to the inevitability of interest rate hikes and the timing of additional changes. It makes a lot of sense to reduce the numbers of marginal buyers who might enter the market between now and the time that carrying costs are higher.
I’m inclined to think that prices won’t rise in the short term but we’ve been surprised before and 2010 was no exception. Given high level of inventory and decreasing sales the most price stats for Saskatoon are a bit perplexing. The growing average is fairly easily explained. When sales of homes priced under $300K fall 18%, and home sale over $300K sales rise by 14% the average sale price is clearly skewed higher by default even if the price of a 1200 square foot bungalow in area X doesn’t change a bit. However, our most recent quarterly house price survey shows six percent year-over-year increases for some housing types and that’s a bit mind boggling. Inventory has been up 20-30% most of the year. More inventory does provide a better selection of premium homes and I think that some of that increase can be attributed to better product changing hands. People are buying the more improved 1200 square foot bungalow and the ones in poor shape end up expiring.
Appreciate the support on Jack’s attack. This is something that I didn’t spend two minutes thinking about today. Given that he doesn’t know me from Adam I won’t take his criticism too seriously.
January 9th, 2011 at 10:13 AM
It’s about time something is done. To simplify this, the higher prices keep rising the lower they will crash. It will be just like in the USA. Something has to be done to tighten things up. A lot of parties are contributing to these ridiculous price increases. Real estate agents need to be more responsible as well instead of helping crank prices through roof. You can save all your fancy figures and charts because the average Canadian income is 42000.00. A year. That does not equate with a 300000.00 mortage. Bottom line. Just wait and you will see. You can’t squeeze blood from a stone.
January 9th, 2011 at 12:04 PM
Bob
The average Canadian income may be $42,000, but when you times it by 2, which is the average number of wage earners in a an average household, then it becomes $84,000. Makes that $300k (or 3.6 times income) average priced property look a lot more affordable
January 9th, 2011 at 3:06 PM
That’s still far from what people should be spending on housing a month. And what about people who are single. It is not sustainable as we shall see. A Big fat correction is on it’s way.
January 9th, 2011 at 8:05 PM
To: Da Bull
You are well named. Check your stats, 42,000 is not the average individual income. Two earners are definitely not 84,000, this is from stats can which is not honest in of itself, because they tend to overblow things for political reasons, not including many local taxes, sales tax etc. its 32,000 (likely less). This is also 2008, I am sure it has gone down. Canuck real estate prices are ridiculous,especially BC. say no to the koolaid my friend.
Income statistics from StatsCan
January 10th, 2011 at 12:54 AM
mr. C
Good stuff, thanks.
Those number you linked to are after tax. From the bottom of page you linked to.
Note: Average income after tax is total income, which includes government transfers, less income tax..
So using those numbers, the average income for a Canadian household is 74,600 x 1,.33 (add in taxes) = $99,100/yr. The price to income ratio is calculated using income before taxes, which means the price to income ration is down to 3.0. This is well within the long term averages. Also incomes have risen since 2008 on average 3.0%/yr. So that now makes that $99,100 worth around $105,103, which again lowers the price to income ratio.
Again thanks for the link.
January 18th, 2011 at 12:49 AM
Thank you, this absolutely needed to be done, I have written to my MP (I am not a realtor).
I’m furious about these nanny-stateish rules. They have lowered our prices and exluded many first time home buyers from the market. Absolute rubbish.
January 18th, 2011 at 7:49 AM
Maureen,
I’m afraid you’re a day late and a dollar short. Rules changes were announced yesterday morning.
Lower prices actually expand housing markets, especially at the entry level.
Who Linked To This Post?