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The Broader Effects of Morneau's Changes to Mortgage Qualification Rules

I think this article points to the broader implications of our government artificially messing with mortgage qualifications.  The impact is not only on first time buyers but also on move up buyers and on the entire construction industry ultimately
From:  REP
Economist predicts the real fallout from new mortgage rules

Economist predicts the real fallout from new mortgage rules

If you haven't heard about the new mortgage qualification rules by now, then take a moment and read up the ways in which the new mortgage rules will impact first-time home buyers.

Experts and laypeople alike are starting to come to terms with the new mortgage regulations, what it means for the current housing market and what it means for anyone planning to buy a home in the near future. But in a report released this week, economist Will Dunning, chief economist for Mortgage Professionals Canada, laid out what he thinks to be the longer-term impacts of the changes in a report titled “Slamming on the Brakes: Assessing the Impacts of Changed Criteria for Mortgage Qualification.”

Since this is only the first week of the new mortgage regulations, and aspects of it won't be rolled out for another month at lease, there isn't enough data to tell the true fallout. Experts, however, say that housing market activity nationwide may be reduced by anywhere from six to 10 per cent. “This would be the initial, direct impact,” Dunning wrote. “Second round effects (reduction in move-up and move-down buying activity) have the potential to double the impact,” which he concludes would fall somewhere between 12 and 20 per cent.

And, he mentions, these effects will occur in all parts of the country, not just in Toronto and Vancouver, the two markets that have been raising the average home price for Canada and that have been being watched very closely -- and reported on widely for months on end. Apart from those markets, housing affordablity nationwide has been fairly balanced, apart from slight dips and slow rises here and there. To think that the rest of Canada will remain untouched is unrealistic; Dunning expects that these areas “will move from balance to weakness; the really hot markets (now Toronto and environs, but formerly also Vancouver) will move from ‘extremely hot’ to ‘hot’.”

Dunning also expects there to be wider economic impacts of the mortgage rules in the way of job growth and creation, something which home builders and developers have been saying for quite some time. “A third effect from this policy change is that job losses that occur as a result of a weakened housing market would further reduce housing market activity (in turn, further aggravating the economic effects).” Slower housing market activity means fewer housing starts, fewer housing-related jobs, and if people don't have jobs, they, in turn certainly won't be buying any houses. According to Dunning, a “15% reduction in housing starts would cost about 50,000 jobs in construction and other industries that contribute to the construction process.” And this doesn't just affect home buyers. Fewer home buyers means more renters, and a tighter rental market is equal to a lower vacancy rate and higher rents. The Bank of Canada predicts that economic growth won't pick up until 2018 based on current information, and dampening a housing market on top of a sluggish national economy could have effects that the government, while they may have considered, would certainly want to avoid.

As to what Dunning thinks about the stress tests, he says posted mortgage rates have an “artificial existence” in the first place because they aren't determined by market forces and they “provide no guidance” as to what interest rates will be in the future. Using this standard to determine whether or not home buyers will be able to afford their mortgage is “unnecessarily cautious” and the next steps of the policy should go so far as to “establish an alternative benchmark interest rate through an explicit assessment of risks for interest rates. This requires urgent attention.”
This is a lot of doom and gloom and ‘ifs’ to absorb. This, however, is exactly where individuals can have a big impact in how the housing market changes in the months and years to come. We as individuals have no say in changes in mortgage guidelines. We do, however, have a say in what we do with that information. Whether that means not selling our home because we don’t think we’ll be able to find another one or changing our retirement plans to downsize much earlier because we’re expecting home prices to fall before we’re really ready to sell, every choice that we make regarding housing is determined by how much we buy into forecasts, expert opinions, and predictions. All of this talk about housing bubbles that we’ve heard on newspapers, television, and yes, on the internet, have spurned many of us to buy homes before we were really ready, in order to ensure that we could buy a home at all. But, Dunning says, there’s another side to that.

“Much less talked about is that there is an opposite to a bubble: if potential home buyers expect that house prices will fall, and decide not to buy as a result, then this can become a “self-reinforcing expectation”, which is also dangerous for the market and the broader economy,” he writes. “If the weakened housing market causes consumers to expect (or fear) that house prices could fall, this would reduce housing demand, further impairing the economy.”

It will be months before we see true impacts of these changes play out. Home sales data released in early 2017 will affect home prices, which will determine which way that we – home buyers and home sellers – react and make pricing decisions. Dunning also says that the impacts on mortgage lending will also take time to appear, because the mortgage funds are advanced when the sale is completed not when the sale is agreed, and because there are reporting and publication lags for the data.

Everyone seems to be on the same page that these new measures will slow housing activity and, in turn, housing prices. How much remains to be seen. But Dunning thinks that there may also be some unintended consequences, such as removing the incentive for borrowers to choose a longer-term, fixed-rate mortgages and borrowers going for the shorter-term mortgages with the lower interest rates. And changing mortgage competition among lenders could result in higher interest rates, both for new home buyers and homeowners renewing their mortgages.

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September Market Update

New Lending Criteria Announced


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  2. Publications and Reports
  3. Backgrounder: Ensuring a Stable Housing Market for All Canadians 

Backgrounder: Ensuring a Stable Housing Market for All Canadians 

Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it. Recognizing that for many families, their homes are their most important asset, the Government is taking preventative measures today to ensure a healthy, competitive and stable housing market for all Canadians.

Today’s actions recognize the effect that years of low interest rates and shifting attitudes towards debt and indebtedness have had on the housing market. While the overall Canadian housing market is sound, house prices have risen significantly in some markets, notably Toronto and Vancouver, and some borrowers are taking on high levels of debt. In these circumstances, it is important to ensure that these debt levels are sustainable, that lenders are acting prudently, and that financial stability risks do not arise in the event of increases in interest rates or a housing market downturn.

The Minister of Finance has been actively engaged on the housing file. One of the Government’s first steps since being elected nearly a year ago was to address pockets of risk in the housing market by raising the minimum down payment for homes priced above $500,000. Since then, Department of Finance Canada officials have been further studying the housing market, and have led a working group with municipalities and provinces, as well as federal agencies such as the Office of the Superintendent of Financial Institutions and Canada Mortgage and Housing Corporation. 

This in-depth analysis, informed by the productive dialogue with our partners, has informed today’s announcement of three complementary measures designed to reinforce the Canadian housing finance system, to help protect the long-term financial security of borrowers, and to improve tax fairness for Canadian homeowners. Analysis and cooperation are ongoing as the Government continues to carefully monitor the situation. 

1. Bringing Consistency to Insured Mortgage Rules

“Mortgage rate stress test” for all insured borrowers:

To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years. Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.

Safer lending:

There are currently different rules in place depending on what proportion of the value of the property is covered by a loan. For example, mortgage insurance criteria for a loan that represents 80 per cent of the value of the property or less (low loan-to-value ratio mortgages) are not as stringent as for high loan-to-value ratio mortgages (loans that represent more than 80 per cent of the value of the property). This could lead to increased risk for the taxpayers who ultimately back insured mortgages. To help ensure that taxpayer support for mortgage funding is targeted towards safer lending, effective November 30, 2016, mortgages insured by lenders through portfolio insurance and other low loan-to-value ratio mortgage insurance must meet the same loan eligibility criteria as high loan-to-value insured mortgages. 

2. Improving Tax Fairness and Closing Loopholes

The Government is committed to tax fairness, and to ensuring that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases. Proposed changes to the tax rules would ensure that the principal residence capital gains exemption is not abused, including by non-residents buying and selling a property in the same year. An additional measure would improve compliance and administration of the tax system with respect to dispositions of real estate, including the sale of a principal residence. 

3. Managing Risk and Protecting Taxpayers

The Government continuously monitors the housing market and is committed to implementing policy measures that maintain a healthy, competitive and stable housing market. As a part of this effort, the Government is looking at whether the distribution of risk in Canada’s housing finance system is balanced, and appropriately reflects all parties’ abilities to share in the management of housing risks.

To this end, the Government will launch a consultation process with market participants this fall on lender risk sharing, a potential policy option that would require mortgage lenders to manage a portion of loan losses on insured mortgages that default. Currently, lenders are able to transfer virtually all of the risk of insured mortgages to mortgage insurers, and indirectly to taxpayers through the government guarantee.

Date modified: 2016-10-03

Market Sats For September 2016 from The Real Estate Board of Greater Vancouver

October 4, 2016

Home buyers and sellers face changing market dynamics

Metro Vancouver* home sales dipped below the 10-year monthly sales average last month. This is the first time this has occurred in the region since May 2014.

Metro Vancouver home sales totalled 2,253 in September 2016, a decrease of 32.6 per cent from the 3,345 sales recorded in September 2015 and a decrease of 9.5 per cent compared to August 2016 when 2,489 homes sold.

Last month’s sales were 9.6 per cent below the 10-year sales average for the month.

“Supply and demand conditions differ today depending on property type,” Dan Morrison, REBGV president said. “We’re seeing more demand for condominiums and townhomes today than in the detached home market.”

New listings for detached, attached and apartment properties in Metro Vancouver totalled 4,799 in September 2016. This represents a decrease of one per cent compared to the 4,846 units listed in September 2015 and an 11.8 per cent increase compared to August 2016 when 4,293 properties were listed.

The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 9,354, a 13.4 per cent decline compared to September 2015 (10,805) and a 10 per cent increase compared to August 2016 (8,506).

The sales-to-active listings ratio for September 2016 is 24.1 per cent. This is the lowest this ratio has been since February 2015. Generally, analysts say that downward pressure on home prices occurs when the ratio dips below the 12 per cent mark, while home prices often experience upward pressure when it reaches the 20 to 22 per cent range in a particular community for a sustained period.

“Changing market conditions are easing upward pressure on home prices in our region,” Morrison said. “There’s uncertainty in the market at the moment and home buyers and sellers are having difficulty establishing price as a result. To help you understand the factors affecting prices, it’s important to talk with a REALTOR®.”

The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $931,900. This represents a 28.9 per cent increase compared to September 2015 and a 0.1 per cent decline compared to August 2016.

Sales of detached properties in September 2016 reached 666, a decrease of 47.6 per cent from the 1,272 detached sales recorded in September 2015. The benchmark price for detached properties is $1,579,400. This represents a 33.7 per cent increase compared to September 2015 and a 0.1 per cent increase compared to August 2016.

Sales of apartment properties reached 1,218 in September 2016, a decrease of 20.3 per cent compared to the 1,529 sales in September 2015.The benchmark price of an apartment property is $511,800. This represents a 23.5 per cent increase compared to September 2015 and a 0.5 per cent decline compared to August 2016.

Attached property sales in September 2016 totalled 369, a decrease of 32.2 per cent compared to the 544 sales in September 2015. The benchmark price of an attached unit is $677,000. This represents a 29.1 per cent increase compared to September 2015 and a 0.1 per cent decline compared to August 2016.

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