Comparing New Amortization & Down Payment Rules…

Government mortgage restrictions instituted from
2008-2011 have not achieved their goal, suggests Desjardins’ Senior Economist
Benoit Durocher.
From Thursday:

“…The third series of
[government mortgage rules] was announced nearly a year ago now, and we must
conclude that the tightening introduced to date has not slowed the market enough.
Under these conditions, it is likely, and perhaps even desirable, that the federal government will shortly announce a fourth series of measures to further limit mortgage credit.”

It almost sounds like Durocher has some inside info.

He adds:

“Among other things, the government could be tempted to once again raise the minimum down payment on new loans (it went from 0% to 5% in October 2008).”

Many believe a down payment increase would have a more chilling effect on home prices than the other option being talked about: a reduction in the maximum amortization from 30 to 25 years.

The difference in impact would depend, however, on the degree of rule changes.

For example, raising the minimum down payment from
5.0% to 7.5% (a possibility that’s been discussed) would require that
entry-level homebuyers come up with $8,700 more on a typical Canadian
purchase. For most, that’s not totally out of reach.

A five percentage point increase to the minimum
down payment is a somewhat different story. Requiring 10% down equates to
$34,780 on an average home. That’s beyond the means of a sizable minority of
first-time buyers.

First-time buyers are essential to home price
stability. They account for 1/2 of unit demand according to Altus Group research. While the latest data suggests that average down payments are somewhere around 30% (an estimated $104,000), first-time buyers put down far less.

That means stricter down payment rules could potentially hurt home values at the margin, if other things are held equal.

In terms of amortization, a government-imposed
reduction—from 30 to 25 years—would lower a typical family’s maximum purchase
price by roughly 9%. (That’s based on today’s 5-year fixed rates, normal
qualification guidelines, median incomes, and average consumer debt.)

To put this in perspective, a reduction in amortization from 30 to 25 years would cut a typical buyer’s maximum possible purchase price by ~$31,000 (again, based on an average income, average debt, a 5% down payment, etc.).

Fortunately, most people don’t need a 30-year
amortization to buy a home. Despite 41% of homebuyers choosing extended amortizations, the majority could have qualified with a standard 25-year mortgage. (That said, this doesn’t mean that cutting amortizations across the board is justified. Well-qualified borrowers deserve a carve-out in the rules because they utilize extended amortizations for
legitimate cash-flow management purposes. But that’s a topic for another day.)


It is a given that new down payment or amortization
restrictions will negatively impact affordability. The government realizes

However, new rules will not necessarily halt the
freight train that is housing. The last three years have made that clear. It
would likely take another recession or higher rates in the face of minimal
employment/income gains to derail the train altogether.

Sidebar: It bears
reminding that if the government did impose new mortgage rules, they would
likely only apply to high-ratio insured mortgages.

Home prices to go up in 2012:

TORONTO – Canadian home prices will continue to go up in 2012, although at a slower pace than they did last year, according to one of the country’s largest real-estate sales organizations.

Royal LePage, which franchises brokerages across the country, predicted Thursday that the national average price for resale homes will increase this year by 2.8 per cent by the end of 2012.

It said the national average price for a standard two-storey home was $375,427 in the fourth quarter of 2011, up 4.2 per cent from 2010.

“Widespread calls for a major real estate correction in 2012 simply can’t be justified. The industry has significant momentum entering the year, and buoyed by the stimulative effect of very low interest rates, we expect the market to continue to expand — albeit at a slower pace,” said Phil Soper, the president and CEO of Royal LePage Real Estate Services.

National averages don’t tell the whole story, however, since there are wide variations depending on the type of home and location.

In Vancouver, a standard two-storey home had an average price of $1.1 million in the fourth quarter of 2012, up 10.9 per cent from a year ago. By contrast, two-storey homes in Atlantic Canada had an average price of $200,000 or less in several cities where increases were fairly flat compared with a year ago.

In Toronto, which is usually the country’s second-most expensive real-estate market after Vancouver, Royal LePage found strong price gains for most housing types in the fourth quarter — due to a lack of available properties and steady demand.

The Royal LePage forecast came as the Statistics Canada reported the price of new homes rose again in November, led by gains in Toronto and Montreal.

The government agency’s new housing price index rose 0.3 per cent in November, after a 0.2 per cent increase in October. On an annual basis, the index was 2.5 per cent higher in November compared with November 2010.

The largest year-over-year price increases in reported by Statistics Canada were in Toronto and Oshawa, Ont., where they were up 6.2 per cent.

In 2012, Royal LePage expects that real estate values in Toronto will increase 2.6 per cent compared to 2011 — slightly slower than the national growth rate.

In the fourth quarter, the average price for detached bungalows rose 7.2 per cent from a year earlier to $532,137; prices for standard two-storey homes rose 4.2 per cent to $629,188 and standard condos rose 3.4 per cent to $347,659.

Some economists have said housing prices in certain Canadian markets, including the Toronto area, may be too high to be sustainable and are due for a correction. However, LePage said housing prices have been high in Toronto because demand has outstripped supply.

“Inventory has been a challenge for Toronto’s potential buyers throughout 2011 and this restricted supply has put upward pressure on prices,” said Gino Romanese, senior vice-president for Royal LePage Real Estate Services Ltd.

“Standard condominiums in the resale market saw a more modest increase due to a healthier supply that was created by newer units coming online. However, demand for older units has increased as they are generally larger in size and preferable to (people down-sizing from houses) who are used to more space.”

In Victoria and Saint John, N.B., house prices were flat or slightly down in the fourth quarter, compared with the same period of 2010.

In Saint John, detached bungalows fell 2.2 per cent year-over-year to $179,946, while standard two-storey properties slipped 0.3 per cent to $298,076. Condos were the exception, with average prices climbing 16.1 per cent year-over-year to $159,370, although LePage said those increases weren’t typical.

In Victoria, standard two-storey homes were unchanged, with prices remaining at $480,000 while detached bungalows slipped 0.8 per cent to $486,000 and condos dropping 1.1 per cent to $282,000.