Tuesday, February 21, 2012

The Mortgage Crunch

Mortgage Rules to Tighten
by Ratehub.ca

Unless you’ve been living under a rock, you should have heard the Canadian housing market has been causing a stir, both locally and abroad. Mortgage rates in Canada are at record lows and Canadians have taken on more household debt than ever. The word on everyone’s lips is – bubble. The opinions differ on whether or not there really is one, but there are two people whose opinions matter a bit more than everyone else’s. They belong to Jim Flaherty, the Finance Minister of Canada, and Mark Carney, the Bank of Canada Governor. Mark Carney has been expressing his concern for a while over the growing amount of household debt Canadians are taking on. Jim Flaherty is concerned that lenders are loosening their mortgage standards and does not want to head down the same path as the U.S. lending market did. [1]

Recently, the Canadian Mortgage and Housing Corporation (CMHC) announced that it has $541 billion in insured mortgages under its books, drawing it ever closer to the agency’s limit of $600 billion. Theoretically, as the CMHC approaches its cap, it would have to start denying new borrowers or make it much harder to qualify. CMHC insurance is necessary for borrowers that have less than a 20% down payment.

There are three types of borrowers that may be hit the hardest if the CMHC so chooses to tighten the rules:

The Self –Employed: Self-employed individuals are motivated to expense as much as possible to minimise their income for tax purposes. Therefore, it may not be representative of their ‘true income’. Self-employed borrowers with less than three years of business operation can access CMHC-insured financing with a 10% down payment through a Stated Income mortgage program. With a Stated Income mortgage, the self-employed borrower must ‘state’ their earnings to the lender. The risk lies in the similarities to stated income subprime mortgages in the U.S despite being a much, much smaller segment of the market.

New to Canada Immigrants: For New to Canada immigrants, obtaining a mortgage is already difficult since they lack a credit and income history in Canada. In order to qualify for a mortgage, new immigrants will have to provide references such as letters from their home bank and credit card company, or obtain an international credit report. Due to the lack of a Canadian financial track record, immigrants are seen as riskier borrowers, even with these screening tools, right or not.

Condo Buyer: For mortgage applicants looking to finance a condominium, lenders will calculate their borrowing capacity using debt-to-income ratios that include only 50% of condo fees. If the government were to tighten rules to limit the number of borrowers, the condo fee calculation for debt-to-income ratios would likely be raised to 100%.


We still don’t know for sure what actions Ottawa will take, if and when they decide to tighten the mortgage market. If they do, the following borrowers may be left in the dark because they present more risk than traditional borrowers. If the government doesn’t increase the limit on the $600 billion mortgage insurance cap - the CMHC will have to take action and work to reduce the amount of mortgage insurance it issues.

Tuesday, February 7, 2012

January Market Watch Report

Strong Sales/Price Growth Continue in 2012

TORONTO, February 8, 2012 —

Greater Toronto REALTORS® reported 4,567 sales through the TorontoMLS® system in January 2012. This number was 8.8 per cent higher than the 4,199 sales reported in January 2011. Sales growth was strongest for low-rise home types in the regions surrounding the City of Toronto.

“A favourable affordability picture bolstered by very low posted fixed mortgage rates has kept home buyers confident in their ability to achieve the Canadian goal of home ownership,” said Toronto Real Estate Board President Richard Silver.

“The buyer pool remains diverse in the GTA with strong interest in home types across the pricing spectrum,” continued Silver. The average selling price for January 2012 transactions was $463,534 – up by almost nine per cent compared to January 2011.

“Low inventory levels have kept competition between buyers strong, resulting in robust annual rates of price growth over the last year. Strong price growth is expected to attract more listings. A better supplied market should result in a slower rate of price growth, especially in the second half of 2012,” said Jason Mercer, the Toronto Real Estate Board’s Senior Manager of Market Analysis.

Jonathan’s Opinion

As you can see by the statistics here, the market continues being a Seller’s market, in that; houses are selling fast and for top dollar. However, you can also view this as a market favourable to Buyers because of the low interest rates that lead to affordable monthly mortgage payments.

Low interest rates and lack of supply will keep this type of market going. There will not be a change in the real estate market activity until there is a change in the monetary policy.

If interest rates remain low (which I believe they will throughout 2012), the housing market will continue being robust, and prices will continue increasing.