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
home
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
this.

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.


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