Down Payment Government Control

[Big Guy]

As of to-day, new rules for down payments on homes takes effect:

http://kitchener.ctvnews.ca/buying-a-house-new-rules-for-mortgages-now-in-effect-1.2778245

So if you purchase a home for $700,000:

5% down payment on first $500,000 = $25,000

10% down payment on remainder $200,000 = $20,000

Total down payment required = $45,000

I am not sure if this is a good or bad idea. I do not like the idea of government getting involved in market controls but understand the need for caution lest we get into what happened in the USA.

Is this a good idea or a bad idea?

Edited February 16, 2016 by Big Guy

[ReeferMadness]

As of to-day, new rules for down payments on homes takes effect:

I am not sure if this is a good or bad idea. I do not like the idea of government getting involved in market controls but understand the need for caution lest we get into what happened in the USA.

Is this a good idea or a bad idea?

I don't believe this is a case of the government "getting involved in market controls"; rather I think it is a case of a government-owned entity (CMHC) adjusting the amount of risk it is prepared to take on. Look at this article. It makes it clear that this is a change to CMHC rules, not legislation. Legislation requires that all high ratio mortgages be covered by insurance and CMHC insures most of the mortgages in Canada. Here is that the NDP had to say

Even some of the government's own critics are welcoming the hike in down payment rules. NDP finance critic Guy Caron calls it "prudent."

"It will decrease the vulnerability of the CMHC and it will actually increase the equity of buyers in houses because obviously they will think twice about buying a house that might not be affordable to them," he said.

This will mainly impact Toronto and Vancouver, both of which are overvalued and increasingly poised for a market readjustment. So, to me it is perfect reasonable for the government to readjust the CMHC rules, both to limit the number of people that will be wiped out when the downturn happens and to protect Canadians from losses via CMHC when that happens.

[TimG]

I am not sure if this is a good or bad idea. I do not like the idea of government getting involved in market controls but understand the need for caution lest we get into what happened in the USA.

The CHMC itself is a massive subsidy to Canadian home buyers and if you are really concerned about government meddling you should be calling for an end to the CHMC. Without the CHMC property prices would be a lot lower because banks would demand even higher down payments and provide fewer loans.

Personally, I think the CHMC serves a useful social purpose but one must remember the consequences to every policy.

Edited February 16, 2016 by TimG

[Topaz]

I do think its aimed at first time buyers over spending on a house they can't really afford but then why would a bank give them a mortgage? In some places, it getting expensive to maintain a house, so maybe first timers should buy cheaper and smaller and check out the property taxes too.

[Bonam]

First time homebuyers can't afford houses that cost 500k+ anyway, unless they are in the top 5% of earners, and for them, the down payment change just means they might have to save up for an extra year before buying. But most houses in this range are purchased by previous homeowners who can extract the equity from their last home to fund a downpayment, or foreign investors who buy all in cash anyway, and so will be unaffected by the down payment change.

This change does nothing to reduce the problems with housing affordability in Vancouver and Toronto and only serves to slightly further skew the playing field in favor of foreign investors as opposed to local buyers.

That said, higher downpayment requirements are good in the long term but, from the article:

Phil Soper, president and CEO of Royal LePage, says the new rules aim to slow the breakneck pace of price growth in the red-hot markets of Toronto and Vancouver without affecting markets that are lagging, such as those in oil-dependent provinces.

and the new rules will fail to achieve that.

Edited February 16, 2016 by Bonam

[Big Guy]

The average detached house price in Canada is about $335,000. Vancouver is over a $million and Toronto is not far behind. Both Vancouver and Toronto prices have increased about 17% over the year.

Is this a good or a bad thing?

A house is the main investment that a family has. The market is flat so what is wrong with gaining 17% on your biggest investment over a year?

What is bad for some is good for others.

[Bonam]

The average detached house price in Canada is about $335,000. Vancouver is over a $million and Toronto is not far behind. Both Vancouver and Toronto prices have increased about 17% over the year.

Is this a good or a bad thing?

A house is the main investment that a family has. The market is flat so what is wrong with gaining 17% on your biggest investment over a year?

It's a bad thing:

http://www.theglobeandmail.com/opinion/a-crisis-in-vancouver-the-lifeblood-of-the-city-is-leaving/article28730533/

Vancouver is a dying city. Many of its young people have already left, and the rest are in the process of leaving, as they can't afford to live in the city, even those who make six figure incomes. It will be an old folks home, a shell of what it once was. And at some point the bubble will pop and the people who thought of their house as their "main investment" will end up screwed, too. And it will serve them right for having supported the politicians that destroyed Vancouver.

Already, half of the west side stands empty, unoccupied houses owned by investors in China and elsewhere. The rest of the city is not far behind.

Edited February 16, 2016 by Bonam

[cybercoma]

First time homebuyers can't afford houses that cost 500k+ anyway, unless they are in the top 5% of earners, and for them, the down payment change just means they might have to save up for an extra year before buying. But most houses in this range are purchased by previous homeowners who can extract the equity from their last home to fund a downpayment, or foreign investors who buy all in cash anyway, and so will be unaffected by the down payment change.

This change does nothing to reduce the problems with housing affordability in Vancouver and Toronto and only serves to slightly further skew the playing field in favor of foreign investors as opposed to local buyers.

That said, higher downpayment requirements are good in the long term but, from the article:

Phil Soper, president and CEO of Royal LePage, says the new rules aim to slow the breakneck pace of price growth in the red-hot markets of Toronto and Vancouver without affecting markets that are lagging, such as those in oil-dependent provinces.[/size]

and the new rules will fail to achieve that.

I thought he purpose wasn't to slow the pace, but to ensure that homebuyers had more equity in their homes from the start in case things go south for them? This "slow the pace" narrative is a salesman trying to ease the ire of customers who aren't going to be happy about it, IMO. The function of the change is higher initial equity though, I believe.

[Bonam]

I thought he purpose wasn't to slow the pace, but to ensure that homebuyers had more equity in their homes from the start in case things go south for them? This "slow the pace" narrative is a salesman trying to ease the ire of customers who aren't going to be happy about it, IMO. The function of the change is higher initial equity though, I believe.

Well, yes, clearly by requiring a higher downpayment you will get higher initial equity, by definition.

[cybercoma]

Right, so I thought it was designed to keep these buyers from losing their shirts with <10% equity to start.

[Bonam]

Right, so I thought it was designed to keep these buyers from losing their shirts with <10% equity to start.

Well, they'll still have less than 10% equity, since it's still only a 5% requirement on the first 500k. When the bubble pops (as all bubbles do eventually) and prices drop to something approaching sense given the incomes in the areas in question, it won't matter if you have 5% equity or 7% equity.

[cybercoma]

So wait, they don't need a full 10% on the entire value? They just need 10% on the value above $500k? It's graduated like taxes?

[Bonam]

So wait, they don't need a full 10% on the entire value? They just need 10% on the value above $500k? It's graduated like taxes?

Yeah that's what the article in the OP says:

Canadians looking to buy homes between $500,000 and $1 million will have to put down larger down payments as new federal rules took effect Monday.

Under the changes, homebuyers must now put at least 10 per cent down on the portion of a home that costs more than $500,000.

Buyers can still put down five per cent on the first $500,000 of a home purchase. Homes that cost more than $1 million still require a 20 per cent down payment.

[overthere]

So wait, they don't need a full 10% on the entire value? They just need 10% on the value above $500k? It's graduated like taxes?

Yes, but only between $500K and $1 million purchase price. If the purchase price is over $1Million, CMHC does not get involved so 20% minimum down is required. That, BTW, was intriduced by Harper as another attempt to rein in the hottest markets. The govt also graduates fat CMHC fees: the higher the loan to value ration, the higher the premium for the CMHC guarantee. It is based on the reasonable premise that the higher the loan, the less equity there is, and a higher risk of default.

Every CDN Prime Minister has used CMHC to manipulate the housing market and industry. Speed it up, slow it down. Things like graduated CMHC fees, amount of down payment required, which rate is the qualifying rate and lentgh of amortzation are all manipulated by Ottawa, plus more. This particular measure was aimed at TO and Vancouver mostly.

[cybercoma]

Given that detail that I didn't know, I don't see how this does much of anything.whats a couple points difference?

[overthere]

It affects mostly first time buyers in the hottest markets, meaning the most likely markets to crash and burn. It is not that hard for two people toqualify for a mortage in the $500k to $1M range, which is hardly a lot in Vancouver, it is certainly first time buyer territory.

It requires them to come up with a few thousand more in equity to buy at all, which means it will squeeze some people out entirely, they remain in rentals. Many people have high incomes and good credit, but never manage to save anything. And real estate is a series of dominos, and the first one to fall is the first time buyer..... When they don't buy, that means that a house does not sell, which means those people don't move up..... and so on. Stopping first time buyers should slow it down a bit. It does not affect first time buyers in other markets at all really.

MUch more meaningful nationally was the switch in recent years of maximum amortizations from 40 to 35 to 30 to the current 25 years.