Feb 16, 2010 Jeremy Torobin and Bill Curry theglobeandmail.com
Finance Minister Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is healthy and there's no solid evidence of a bubble, the moves are needed to “help prevent negative trends from developing.”
Under the new rules, all borrowers will need to meet standards for five-year fixed-rate mortgages regardless of whether they're seeking a loan with a lower rate and shorter term.
Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on “speculative” investment properties.
“There are no definitive signs of a housing bubble,” Mr. Flaherty said. “We think we're being proactive in the three steps we're taking today.”
Scotia Capital economist Derek Holt said the tighter criteria for mortgages could cause the housing market to ``really heat up” over the next few months as buyers try to get approved before the stricter rules come into force.
"This all leads to short-term price scrambling,” Mr. Holt said in an interview, noting that the Harmonized Sales Tax due to take effect in Ontario and British Columbia on July 1 is already causing some buyers to rush into the market in a bid to close deals in advance. ``It could really heat up in the near term and then cool off in the back end of the year. With the HST in Ontario and B.C. and these changes, they have dramatically altered the home-buying decisions of Canadians.”
The three new changes to the mortgage insurance guarantee rules are intended to take effect on April 19, according to a statement.
Mr. Flaherty stressed that some lenders are already applying stricter standards when approving buyers for mortgages, but said today's announcement was needed to ensure others start doing so.
"I prefer not to give direction to lending institutions about what their practices ought to be and what their standards ought to be,” he said. ``We are now providing direction in what they ought to do.''
In reference to the tightening of refinancing rules, Mr. Flaherty said this will encourage Canadians to build equity in their homes instead of tapping that equity as a source of cash.
“This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up,” he said. ``We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than as a vehicle for quick cash.”
In his comments on the third measure, Mr. Flaherty said the hike in minimum down payments for such properties will help keep prices from climbing too high.
“We will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable levels which does not serve Canadian home buyers,” he said.
“We're not aiming here at investment properties,” Mr. Flaherty added. “What we're getting at is the speculation in multiple-condo markets, in particular.”
A backgrounder circulated by Finance Department officials explained that the change won't apply to borrowers who buy residential properties where they plan to live but which also include some rental units.
"The problem is this multiple-unit, non-owner-occupied situation,” he said.
At the same time, Mr. Flaherty acknowledged that even though most lenders already ask mortgage-seekers if they plan to live in the home they're trying to buy, they're not always sure they get an accurate response. The new rule is ``not easy to administer but it's not impossible either,” he said.
The Canadian Real Estate Association said in a report last week that low interest rates will push home resales and prices to records this year.
The new rules are meant to “have some stabilizing effect” and encourage "moderation” in the market, Mr. Flaherty said. When asked if that means the moves will push home prices lower, the minister said the main purpose was to curb the type of “excesses” that helped fuel the subprime-mortgage meltdown in the United States.
“You can see people starting to use the equity in their homes as if it were cash and the assumption that took hold that housing prices only ever go up,” Mr. Flaherty said, adding the government is worried about “the tendency for those who have limited credit to speculate in the market,” because ``they're the first ones to get into trouble in the market when interest rates go up.''
The moves send an appropriate message to borrowers about debt, said CIBC economist Avery Shenfeld. While the rules don't take effect yet, Mr. Shenfeld suggested that the banks might begin adopting them earlier. And they could take a little bit of steam out of the market, he said.
“It may be part of a cooling that we'll see in house price appreciation,” he said. “We were pushing into house prices that were running a bit ahead of rental rates and income fundamentals – not to the point that we feared a huge house price crash, but to the point that it might be time to head-off such risks.”