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Mortgage rules toughened to rein in consumer debt

Carla Wilson, Victoria Times-Colonist, January 18, 2011

Tighter federal mortgage rules may squeeze some potential homebuyers out of the market but are not expected to drastically affect prices, say Greater Victoria real estate officials.

Those seeking high-ratio (with less than 20 per cent downpayment) mortgages — often newcomers to the market — could be priced out of the market for now while others may have to pare expectations.

Victoria Real Estate president Dennis Fimrite said Monday he does not think the changes will have a huge impact. "We are always disappointed when it makes it tougher, especially for first-time home- buyers, to purchase a home. But the changes that they've made aren't dramatic," said Fimrite.

He expects prices to be similar to last year's.

The average price of a single-family house in Greater Victoria in December was $647,063 and the median was $574,750. Condominiums averaged $301,671, with a median of $285,000. Slightly more than 24 per cent of last year's sales were by first-time buyers, said the Victoria Real Estate Board.

Finance Minister Jim Flaherty cracked down on Canadians' ability to qualify for a mortgage, in the government's latest attempt to rein in consumer debt.

Flaherty announced Monday the government is reducing the maximum amortization period for government-backed mortgages to 30 years from 35 years. The change will affect mortgages with loan-to-value ratios over 80 per cent.

Canadians will only be able to borrow up to 85 per cent of the value of their homes, down from 90 per cent.

In addition, the government is withdrawing backing for lines of credit secured by people's homes.

Flaherty said the changes are designed to prevent the kind of housing bubbles that developed in other countries, most notably in the United States, where the collapse of the subprime mortgage market triggered the global financial crisis.

"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues in some other countries that have been very damaging to families," the minister told reporters after unveiling the mortgage changes.

Flaherty said the decision was based on the long-term goal of protecting household finances and the broader economy, rather than on any particular data on the housing market.

Cameron Muir, chief economist at the B.C. Real Estate Association, said the purchasing power of households that are looking at high-ratio mortgages, going to 30 from 35 year amortization, "pulls about five per cent of their purchasing power away from them."

"The effect will likely squeeze some potential homebuyers out of the marketplace," Muir said from Vancouver. Others may have to "moderate their expectations" when it comes to criteria such as age, size, neighbourhood.

"Any time you tighten up credit, that is going to have an impact on overall consumer demand. It also has an impact on the pricing side." It's too soon to say what that price decrease might be, but it "won't be dramatic," Muir said.

Pre-qualified buyers may act now to buy a home before the changes come into effect on March 18.

Renovations may also decrease because the government is withdrawing backing for lines of credit secured by people's homes. Canada Mortgage and Housing's forecast for this year predicts B.C. renos will be worth $7.8 billion this year, he said.

Mike Holmes, managing broker at Pemberton Holmes, agrees the changes may tighten purchasing power by about five per cent, leading to a "modest impact on sales."

"This is probably the last change we will see and it is a return to historical norms. Financing in Canada — as compared to many countries — remains affordable and accessible," Holmes said.

Rudy Nielsen, president of real estate data firm Landcor Data Corp. and NIHO, a property development company, welcomes the changes, saying from New Westminster, "you've got to keep Canada sound."

He too does not expect a major impact on sales. Rather, Nielsen expects the new limit to have more impact on those who are mortgaging their homes to speculate in the market.

Maria Dominelli, mortgage broker with Invis, calls the changes prudent. "I think they are trying to preserve the integrity of the whole real estate and banking system by doing that."

Changes will affect a small percentage of first- time homebuyers, she said. Many first-time buyers have saved a 20 per cent downpayment, or are receiving their inheritance early. New limits may see family members helping out more on downpayments.

Also, "I think that people will be looking at the condo market more. That's just based on calls this morning."

A number of economic observers, including Bank of Canada Governor Mark Canada, have recently expressed concern about the record-high debt levels of Canadians. Based on the ratio of debt to income, Canadians are actually deeper in the red than American households, which are still struggling to dig themselves out from the debt taken on before the financial crisis.

Flaherty said Canadian families must keep in mind that interest rates will eventually rise from their relatively low levels. Economists have expressed concern that a sharp rise in interest rates could leave Canadians stranded with too much debt.