Federal move on housing. Did they go too far?

[CITIZEN_2015]

Ottawa brought in tough measures to contain the housing market which is overheated ONLY in a few places like Vancouver and Toronto and Hamilton however measures announced today I believe is going to significantly adversely affect an already slow housing market in the rest of Canada like Edmonton, Calgary, Ottawa, Montreal, Winnipeg, Saskatoon and Regina among many others or may be even causing a housing crash in these areas. Last time I checked Canada was more than just Vancouver and Toronto. Based on my calculations to qualify for a modest house or condo of $350,000 to $400,000 (average price outside of Vancouver and Toronto) you need an income of over $100,000 (over reduced term of 25 years and loan to income ratio of 32% which includes mortgage payment, property tax and half condo fees, if buying a condo (considering that the new qualified rate is 4.64% not the old discounted rate in calculating mortgage payment) and all these even if your loan to value ratio is less than 80% (or your down payment is over 20%) with this new measures. What percentage of population have 100 thousand plus income to be able to qualify for a modest average house outside the few hot spots? Not many, if any.

I believe that since this was a localized problem then municipalities or provinces should have addressed the issue LIMITED only to those few hot spots (Vancouver, Toronto, Hamilton) like the foreign tax in Vancouver which was a great and effective move rather than at Federal level which applies to the entire country even those places where prices already dropping or stagnated. They claim they want to make housing affordable to Canadians but now those who could afford it and still can won't qualify under these tough measures and would remain homeless for a long time to come or until they realize their mistake which for most governments is hard to admit and very rare to reverse.

This is the link to the summary

http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/house-prices-will-not-rise-forever-base-your-financial-decisions-accordingly/article32219135/

You now have to take this test if you’re in this group and want a variable-rate mortgage or a fixed-rate mortgage with a term under five years. Starting with mortgage insurance applications made on Oct. 17 and thereafter, fixed-rate mortgages of five years and longer will be included as well. Mortgage broker David Larock said two-thirds of borrowers today are going with the five-year rate, so including them in the stress test is a major development.

This is all the more true when you consider just how tough the stress test is. The idea is to see if you can handle rates at levels that are much higher than they are today. The reference rate is called the Bank of Canada conventional five-year fixed posted mortgage rate, and it’s based on rates advertised by the Big Six banks. This rate now sits at 4.64 per cent, which compares to about 2.4 per cent for a nicely discounted five-year fixed rate in today’s market.

Only a minority of mortgages in Canada these days require mortgage insurance, which means a lot of buyers have down payments of 20 per cent of more. While it’s not widely known, lenders are increasingly having these mortgages insured as well. Lenders are bearing the cost of the insurance, so it’s basically an invisible process for the customer.

Starting Nov. 30, however, lenders will have to be more stringent in cases where they’re insuring the mortgages of clients who have a down payment of 20 per cent or more. These customers will have to meet the same tough borrowing requirements as people with high-ratio mortgages (down payments less than 20 per cent). For example, the stress test will be used and the maximum amortization period will be 25 years.

Finally, the government is closing loopholes that foreign buyers use to avoid paying capital gains tax on homes in this country. Canadians do not have to pay tax on the gains if they sell their principal residence for more than they pay.

[BC_chick]

They claim they want to make housing affordable to Canadians but now those who could afford it and still can won't qualify under these tough measures and would remain homeless for a long time to come or until they realize their mistake which for most governments is hard to admit and very rare to reverse.

It'll make things more affordable. They've now curtailed the local demand in the same way Vancouver had done to foreign demand.

Inevitably this leads to prices coming down. It's basic economics.

The whole country needed an intervention, not just Vancouver and GTA.

[eyeball]

I'd like to be socially responsible and rent my place to someone who needs an affordable place. Unfortunately I need as much money as I can get my hands on so Airbnb here I come.

If the guvmint would let us go fishing and logging like we used to for a living maybe I wouldn't have to be such a greedy landlord.

[eyeball]

So what happens to people stuck with mortgages for their now devalued properties?

[BC_chick]

So what happens to people stuck with mortgages for their now devalued properties?

The only people getting screwed are foreign buyers with pending contracts, speculators, and first time buyers.

Foreign buyers with pending contracts should have been given exemptions, I think the Clark government handled that terribly. Speculators I don't feel sorry for because that's the risk for doing business in such a frothy market. You lose big or you gain big. Long-term investors are in it for the long-haul so hopefully it won't make a difference unless interest rates go up tremendously which I don't see happening.

That leaves first-time buyers and what can I say? Anytime a bubble bursts the people who bought in the euphoria stage are going to see their assets devalue, but their terrible timing isn't reason enough to allow the bubble to continue. The longer it goes on, the uglier it's gonna get. We needed an intervention, I have no doubt about that.

[TimG]

Foreign buyers with pending contracts should have been given exemptions, I think the Clark government handled that terribly.

Clark did not have much of a choice since the agreement to sale is generally not filed with the government. That would mean agents-sellers-buyers would have an incentive to collude and backdate any contracts to avoid the tax. I agree it seems unreasonable but regulations cannot leave giant loopholes that reward dishonest people.

[Moonlight Graham]

Houses are for people to live in. They shouldn't be for foreign speculative investors. I'm not a real estate expert but hopefully this will cool off the markets.

I think one of the biggest problems is that new immigrants are choosing Vancouver and Toronto at far higher rates than other cities in Canada. This creates problems far beyond housing prices. It creates massive stress on all infrastructure in these cities that's been difficult for the municipalities to keep up with. It also has ramifications with changing local cultures.

[BC_chick]

TimG, no, there could have been ways around it. Those in existing contracts could have had to get their contracts notarized by a certain period, for example.

What happened was a travesty.

Edited October 4, 2016 by BC_chick

[CITIZEN_2015]

They may not have realized it (and I see that some people here haven't either) but with their actions they shut down the entire economy. Once people lose their equity they lose confidence and stop spending and consumer confidence has been the only thing driving the Canadian economy past many years and then once people with lost equity stop spending there will be a recession and loss of many jobs and larger budget deficits forcing cuts and more job loses. All results of over-reaction by the Feds to so called over-heated housing market which in fact was slow not overheated for 80% of the country, The Feds should have looked beyond Toronto and Vancouver and as I said this was a local issue and should have been addressed by local governments, Federal government had no place in this. The housing market is likely the only market that when it comes down everybody will lose even those who don't have houses.

Edited October 4, 2016 by CITIZEN_2015

[msj]

Federal government had no place in this.

Who backs the mortgage insurance?

Who regulates lending and the banks?

[CITIZEN_2015]

Who backs the mortgage insurance?

Who regulates lending and the banks?

As I said the overheated housing market was a local issue limited only to a few cities and NOT across the country or country-wide and less than 20% of population were affected. It should have been addressed by local governments the way that BC acted for Vancouver last August. A similar tax for Toronto would have slowed down those markets. The Feds overreacted significantly and miscalculated by large and now we all will pay a very high price for that. We are all screwed thanks to Feds overreaction.

Edited October 4, 2016 by CITIZEN_2015

[TimG]

TimG, no, there could have been ways around it. Those in existing contracts could have had to get their contracts notarized by a certain period, for example.

Then they find a notary that will accept bribes. When everyone involved in a transaction has an incentive to skirt the rules it is very hard to catch them.

[?Impact]

As I said the overheated housing market was a local issue limited only to a few cities and less than 20% of population.

If your market is not overheated, the you can afford the house. If you are unable to afford the house at this rate, then the market is overheated.

[msj]

. The Feds overreacted and now we all will pay a very high price for that.

So you either don't know the answer or are not willing to admit the role the Feds have already played in real estate across the country.

BTW, as a taxpayer of both federal and provincial income taxes I do not approve of 100% taxpayer backed insurance should the poop hit the fan like Fannie Mae and Freddie Mac in the US.

The banks and the mortgage holders should take on the risk - at least going forward since risk is so elevated thanks to years of low interest rates and government policy that have allowed debt/real estate to get us into this bind in the first place.

[TimG]

The banks and the mortgage holders should take on the risk - at least going forward since risk is so elevated thanks to years of low interest rates and government policy that have allowed debt/real estate to get us into this bind in the first place.

Yes. CHMC should only be on the hook for the difference between a down payment that does not require insurance and the actual down payment (a maximum of 20%). The banks should be liable for the rest. Edited October 4, 2016 by TimG

[bush_cheney2004]

....BTW, as a taxpayer of both federal and provincial income taxes I do not approve of 100% taxpayer backed insurance should the poop hit the fan like Fannie Mae and Freddie Mac in the US.

That's great for Canada...U.S. taxpayers are happy with the resulting bailout profit. Good thing there is an international border.

[CITIZEN_2015]

If your market is not overheated, the you can afford the house. If you are unable to afford the house at this rate, then the market is overheated.

I admitted that it was overheated in a few locations and people couldn't afford to buy in a few cities but in many cities yes many could afford to buy houses and were doing so and prices were going up very modestly and even started to come down a bit. But now it will crash like a plane being shot down and the Feds did this by they miscalculated action.

Edited October 4, 2016 by CITIZEN_2015

[BC_chick]

Then they find a notary that will accept bribes. When everyone involved in a transaction has an incentive to skirt the rules it is very hard to catch them.

I would think that the majority of the cases would not be fraudulent. Also, how long can it go on, inevitably it'll have to stop. It's worth allowing some purchases to go through fraudulently in order to maintain a certain level of integrity within the government but that's just my opinion.

Ultimately, if f someone wants to cheat, they'll find a way to cheat.

[BC_chick]

As I said the overheated housing market was a local issue limited only to a few cities and NOT across the country or country-wide and less than 20% of population were affected. It should have been addressed by local governments the way that BC acted for Vancouver last August. A similar tax for Toronto would have slowed down those markets. The Feds overreacted significantly and miscalculated by large and now we all will pay a very high price for that. We are all screwed thanks to Feds overreaction.

It's way more than 20%. Vancouver and GTA make up 25% of the country's population alone but it also trickles down to the areas around it. All you have to do is look around Vancouver Island and Chilliwack to see how unaffordable things are becoming. Even the Okanagan is getting pricey. I'm sure the cities around Toronto are in the same boat.

Also, what is wrong with ensuring that people can afford a what is essentially a very modest rate hike?

[CITIZEN_2015]

Even to those who believe the Feds had a place to intervene when it was a local issue then I would say that they took too many actions all at one time. They should have taken one action at a time, monitor the situation and then bring another if the first action was not effective enough and so on. They brought in several very tough measures all together in one day and this will cause crash of housing market in Canada (the only bright spot in Canadian economy) and loss of equity for millions of people and loss of consumer confidence and a recession and jobs loses and budget deficits and cut backs at all levels of governments as well as private sectors. Do they have economists in the Finance department??. I guess not.

Edited October 4, 2016 by CITIZEN_2015

[CITIZEN_2015]

Also, what is wrong with ensuring that people can afford a what is essentially a very modest rate hike?

There will be severe economic consequences in 6 months to a year from now. Not only they destroyed the housing market as nobody can qualify to buy houses now or very few do but they also shut down the Canadian economy.

Edited October 4, 2016 by CITIZEN_2015

[msj]

Let's wait and see.

Interest rates could spike up tomorrow which makes this all moot since that would kill the housing market all on its very own.

Oh, and Canada does not have as much control over interest rates as people like to think. The bond markets set the rates.

[CITIZEN_2015]

Interest rates will stay historic lows until at least 2019 but though many people can afford to buy houses but no one can qualify for mortgage regardless of how low mortgages are or will be. You have to have an income of $100,000 to $120,000 to qualify for an average modest home in 70% of Canada and an income of over $250,000 to buy an average house in heated areas. In other words only a few percentage of near millionaires would stay in real estate market and still buy and it will be out of reach for overwhelming majority of general population who can afford buying but won't qualify with these tough measures.

The important thing is that the Feds ENGINEERED A HOUSING CRASH by their overreaction. They created exactly what they were trying to prevent and were afraid might happen and that is devaluation of houses by 30 to 50% and a resulting recession.

Edited October 4, 2016 by CITIZEN_2015

[Smallc]

Nice crystal ball you have.

[msj]

Interest rates can still be low and still rise and crash a housing market.

Who knows. It could happen.

Australia has just seen their 10 yr bond yield increase by almost 10% this morning (their time). But let's see that turn into a trend before any further judgement.

Besides, we have seen this before when the Feds reduced amortization from 40 years to 25 and down payments from 0% to 5% so who knows.

I'd watch world interest rates first and Canadian unemployment rates second as the main factors in any housing/debt bubble burst.

And it will hurt YVR and TO harder than the rest of Canada so be thankful for that.

Who knows, maybe CDN's will become sensible and prudent borrowers someday.

"Someday this debt bubble is going to end."