Flaherty’s Folly Kills Rosy Vancouver Home Buying Dreams
Posted June 23rd, 2012 in Mortgage Rates, Real Estate | 
Out of the Bag
It is out of the bag!
The news of the Federal Finance Minister’s change to mortgage rules has flowed onto every front page.
History may look upon this pronouncement and call it Flaherty’s Folly. In the interim, many buyers will see it as more blood drained from their rosy dream of owning a Vancouver home.
Interpretation
Our sponsors at Invis Rob Regan-Pollack had this to say:
“In a surprising move, The Department of Finance has announced new mortgage rules in order to stabilize the continued rise in consumer debt. The new changes to mortgage rules for Regulated Lenders, will take effect July 9th. Beyond the reduction of amortization and 80% limits for refinances, the potentially most harmful change for consumers is the elimination of mortgage loan insurance for properties valued at over a Million Dollars.”
“From a market competition standpoint many mortgage banks rely on mortgage insurance to securitize and sell their mortgages. Taken literally the new changes may mean that a mortgage bank may no longer be able to securitize mortgages on purchases over a $1.0M dollars. While we support the government in its move for stability, we are concerned by changes that may limit competition and choice for consumers.”
“With the implementation of a maximum housing allowance, and reduction of amortization to 25 years, here is an example of how the changes will affect an average household buyer with a family income of $80,000/yr.”
Maximum Mortgage Amount:
- $80,000 Income
- 3.19% Annual Percentage Rate (APR)
- 5 Year Fixed Term
| Old Rules: | New Rules: |
|---|---|
| 44% of Gross income – 30 Year Amortization | 39% of Gross Income – 25 Year Amortization |
| $611,305 Mortgage | $533,923 Mortgage *There is no doubt this 13% reduction in buying power will cool the market. |
| Monthly Payment: $2633.34 Principle and Interest |
Monthly Payment: $2300 Principle and Interest |
Text and Table Courtesy Invis – Rob Regan-Pollock
Just a quick note – it’s “folly” not “folley”.
I was under the impression from reading other blogs, that the percentage of gross income allowed actually went up from 32% to 39%, making the decrease in amortization a bit less of a concern.
I also see it on this webpage
http://www.canadamortgage.com/calculators/convhighratio.cgi
“Typical loan qualification criteria require that borrowers spend no more than 32% of their gross income (Gross Debt Service Ratio or GDSR) on shelter financial obligation including mortgage payments, taxes, utilities and half of condo fees. In addition, borrowers should spend no more than an additional 8% to 10% (Total Debt Service Ratio or TDSR = 40% to 42%) of their gross income on all other financial obligation including personal loans, car loans, credit cards and other debts.”
am i missing something?
this is actually a better link
http://canadianfinanceblog.com/debt-service-ratio-gds-and-tds/
@ruth
can never get enough editing – thanks
@vangrl
Rob McLister’s version:
“In addition, the government will:
Limit the maximum gross debt service (GDS) and total debt service (TDS) to 39% and 44% respectively (Currently, GDS does not apply to qualified borrowers with credit scores of 680+)”
The young first-time home buyers in Vancouver should be very thankful for the existence of the CMHC. When the Liberals removed the original CMHC price ceiling in 2003, they helped to usher in a wave of cheaper house prices throughout the greater Vancouver area.
Fortunately the Conservatives could recognize a good thing when they saw it, and upon coming to power in 2006 they continued to further loosen lending requirements, even having the government guarantee mortgages with no down payment and 40 year amortizations. Young people rejoiced as house prices in metro Vancouver shot downwards to levels that had not been seen in generations.
Now something has gone horribly wrong with the governance of our once great nation! Instead of taking the logical next step and insuring 50 year mortgages with negative down payments, they’ve decided to tighten requirements! These dangerous idiots are about to drive Vancouver house prices higher for the first time in the new millennium! What is wrong with these monsters? PLEASE I BEG YOU MR. FLAHERTY THINK OF THE YOUNG PEOPLE.
so they are actually increasing it, but also enforcing it
I don’t think I’ve ever seen a more partisan post from you Larry.
Far from it being a ‘folly’ to introduce these tightened regulations, it is long overdue and to my mind does not go far enough. I understand that Realtors and Mortgage brokers won’t be happy with the reduced business but frankly every right thinking tax-payer should be happy about these changes.
What ever did banks do before CMHC insurance?
Does it mean that prices never could have climbed that high without government interference via CMHC enabling insurance?
Far from Flaherty’s folly it sounds more like the first steps in ending the enabling of the housing bubble.
The effects of this on Vancouver real estate will likely be negligible.
Essentially what this does is curtails local homeowner buying power, but Vancouver prices will still continue rising despite these restrictions.
With locals buying power limited foreign investors buying with all cash (as 95% of them do) will continue to deal in our real estate thus increasing prices.
Sales will continue and prices will rise at the same pace but it’ll just be mostly foreign investors instead of locals.
@whisperer
“What ever did banks do before CMHC insurance”
I suspect they didn’t lend money to buy houses
How dare Flaherty do this?
Doesn’t he know that it is our God given right to buy a Multimillion piece of land with some-by-fours and tar paper on it…and have the tax-payer insure the mortgage.
It is our right damn it.
With Canadian household debt approaching American levels prior to the US crash, the Bank of Canada unable to increase the prime rate any time soon, and CMHC approaching it’s insuring limit. The Finance Minister’s move doesn’t seem like “folly” since taxpayers are ultimately responsible for CMHC insured mortgage defaults or a potential real estate crash. To me it seems the government has acted far too slowly and at times not enough.
Interesting changes. I do think it’s about time that more restrictions were introduced.
I disagree that it won’t have an impact on the market like CBM suggests.
“With locals buying power limited foreign investors buying with all cash (as 95% of them do) will continue to deal in our real estate thus increasing prices.”
CBM, I am not sure where you got your data from but my banker in Point Grey who sees many foreign transactions tells me this is anything but the case. They usually put a certain dollar value down, there is a max they can pull out in cash at any given time and then they finance the rest via mortgages. Interestingly enough there are (or were, this may have changed in the last few months) far fewer rules when lending to foreigners than there are when lending to Canadians.
In any case, in a market that is already taking a turn, to suggest these changes won’t have an impact is foolhardy. If I were in the market for a house now, I would wait to see what happens. We know i rates aren’t going up in the near future….so what’s the rush? Unless you know you will never be able to afford the 20% down.
@ Anon
Well I deal with a real estate agent who sells on the west side of Vancouver and he tells me basically that there is an unlimited amount of money coming in from Mainland China still and the market has just stalled a bit because the Chinese have taken a break for a while, but they’ll be back with even more money very shortly.
He also informed me that 95-99% of the people he deals with buy all in cash because it’s a cultural thing. Granted, this is only people he deals with, so maybe there are other Chinese who take mortgages…..I don’t know anything about that.
The argument he made was that these rules will only impact people like me who would be potential first time buyers. The foreign investors will have all cash so they’re not affected by mortgage rules and the like and there’s enough of them that they’ll just keep the high end of the market going (north shore, west side van, richmond etc.) and it’ll get to a point where most of Vancouver is owned by foreign investors and the only option left for locals will be to rent from investors who will control the market because locals are priced out.
Flahertys’ Folly happened years ago when he loosened the rules in the first place, and created the RE bubble. He is trying to fix the damage done.
The average house price here in Canada is $375,000, and people don’t think that price is much too high? I am an average Canadian making an average wage, and it is unaffordable. I don’t understand how people don’t see that, or try to explain it as good.
This will not end well…
Talking to my realtor buddies in the West Side & West Van, the Mainland Chinese & HK’ers are no longer coming here in droves like last year. They are no longer bringing suitcases of cash. They just look around, & decide to go to the states like California since it’s much cheaper, higher quality, & a bigger Asian population. Heck they even have a better hockey and soccer team. lol They all stated that business has dropped 50-60%. It’s usually the locals that are looking around esp East Side. East Side still has it thing going, though slower than last year.
Let’s not use the fed as a scape goat here. We must remember that, we are currently down on average price 3 months in a row. The last time this happened was 2008. The last time we saw 4 red months in a row was over 10 years ago. If we see the average price go down from May > June then it’s even worse. But the bottom line is, the market is already hooped. This just adds fuel to the fire. The govt actually crushed our dreams 3 years ago, when they didn’t let the crash happen in 2009 and tried to step in. They made the bubble worse and now it’s time to pay the piper.
Great move by the finance minister. Will save people from themselves. A lot of bears with cash savings who have been waiting for sanity and a return to fundamentals, might be giving you business in the future Larry. Cheer up and be so short-sighted.
CBM,
“Sales will continue and prices will rise at the same pace but it’ll just be mostly foreign investors instead of locals.”
Real estate is local. If foreigners continue to come( which their not) and boot the citizens of our city, should we all leave and let them rule our land? Your theory is bunk.
All i know is that a lot of Asians are heading back to China/Korea etc, i also know of a RE agent who just had his Merc repo, not to mention the RE appraiser i know who has his house and toys up for sale as he lost his job due to low demand.
Things are falling apart if you can’t see whats coming…look out!
CBM says…
…there is an unlimited amount of money coming in from Mainland China still and the market has just stalled a bit because the Chinese have taken a break for a while, but they’ll be back with even more money very shortly.
—————————-
I highly doubt that… Ever since my “house arrest” CPC (Communist Party of China, not to be confused with Conservtive Part of Canada) has been tightening the screws on foreign capital flight… Don’t want to upset the hoi polloi short of the decenial transfer of power from which I was so forecefully shut out. As well, many of my mainland “confrères” have experience important declines of their domestic holdings… When the palace is on fire, you sacrifice the barn…
I think Flaherty’s Folly was introducing the 0% down, 40 year amortization mortgage in 2006. Then again CMHC’s Board of Directors was then stuffed with real estate insiders and lobbyists and they were itching to “compete” against AIG. I’m sure they realized opening up the governmental purse strings wouldn’t hurt their business interests either…
“unlimited cash”
This is akin to a grade school physics problem assuming free space is infinite, then in higher level experimental courses we find out it never works that way. Capital is not infinite.
Before y’all spend all your time contemplating the timing of Flats mortgage rule changes over the years, it’s important to realize he doesn’t give a crap about the Vancouver market. If you analyze his loosening and tightening in relation to performance in Toronto, it all starts to make sense.
The idea that the chinese coming here with bags of money is just superficial. How would you know the cash they brought here were not backed up by tons loads of debts back at home?
Let me give you an example. There were a speculator from Wenzhou China who purchased an apartment in West Kowloon, HK 2 years ago at a price which set record at the time ($5000/sf). He needed to sell his apartment several months ago at a loss to make up for his margin calls amid all the troubles in the private lending business in Wenzhou.
It’s the must-sellers and must-buyers who set the price in the market. It’s true that a lot of chinese bought Westside SFHs with cash only but there just needs to be a portion who bought with questionable collaterals back home and bam, you have a margin call and a must-seller.
That said. This latest news regarding amortization pales in comparison to the latest news from China that it is relaxing its lending standard again after 1.5 years of restrictions. This, IMO, will means more to West side SHFs in the immediate future.
“that it is relaxing its lending standard again after 1.5 years of restrictions”
relaxing it by allowing Chinese to buy more properties in China? making it less likely they’ll want to move their money elsewhere?
I think this entire debate is idiotic.
Make it MORE difficult to buy a place, and the prices will go DOWN to compensate.
Duh.
@Boombust
Didn’t you get the memo? Vancouver IS DIFFERENT. Seriously. The laws of economics just don’t apply to us, ever. The housing market will go up forever here. Why wouldn’t it? We have limited land and nice views….lol.
Flaherty’s Folly ?
So, you’d rather have on-going easy credit with loose lending standards to fuel ever higher prices for housing, No, no, no Larry!
It is now well known that the Construction Industry now has an “elevated share of the Canadian Economy”. This means that any housing related downturn will impact the Economy heavily. Flaherty HAD to do this NOW.
We are now starting to hear from the US credit rating agencies that the Canadian DEBT BUBBLE is simply TOO BIG, with no way to pay it off. The folly, as you call it, may actually be “too little, too late”. Stronger measures such as minimum 10% down payment may also be needed to stop debt growth.
Deleveraging is here, what has hit all other major economies is about to hit Canada. Get ready!
I’m a first time buyer in that I have never owned a home. I rent a million dollar home for less than $2k a month and I have no interest in doubling my monthly payment just to say I own this box.
I like the changes that F has implemented. It will stop people from making bad decisions.
As inventory swells because people can’t afford the ridiculous prices in Vancouver, prices will fall making the market much more attractive to me in the next 5 years.
The real estate bull fuelled by debt has been tamed and it’s about time.
I mentioned it in August, but nobody mentions the changes to the ‘Investor Immigrant Program’. If you had 1.2 million and contributed 600k to a real asset, that was your ticket in to Canada. Anyone from all countries welcome, no limit. On July 31, 2011 that number was limited to 600 people per year. 600 for all of canada!! there was a backdoor way through quebec, but that is cut off now. So if you’re from China, and you do have a suitcase of cash to buy a house with, thats too bad, because only 600 people from the entire world are allowed into the country per year under the new rules. combined with these recent changes which should’ve been made at the same time the emergency rates kicked in 08/09 IMHO. Now it’s just a bigger cliff to fall off of.
BEHOLD THE MATRIX VANCOUVER reality and gravity have arrived anyway,Why OFSI and the feds had to do it now is alarming!!! Van was already cooked. But what were you guys thinking??? lol. Looking forward to buying in Vancouver in 2019 maybe? for now, going to tucson, az to buy houses for 3 grand a pop. Hope your underwater house isn’t too far a drive to work. Good luck all.
BTW the govt has had it in for Vancouver for the last year now, all of the changes are because of Vancouver and Toronto. I can see negative migration in vancouver and locals have already been driven away.
What a death blow the govt has thrown at the asian community. how many of the current listings are expensive asian properties, with less than 600 new asians to come in and buy who are these properties going to be sold too? it wont be to the working middle class, as they cant pay 1.5 million.
it wont be investor immigrants because theyre not allowed in anymore.
“Thanks for the 1.2 million dollars you contributed to our economy and now we’re going to kill your net worth. Welcome to canada!!!”
your friends Carney and Flaherty
@TRASHY…………
I believe you may be mistaken, An immigrant applicant under the Immigrant Investor Program must be able to show that they have a net worth of $1.6 Million that must be shown to be legitimately theirs and commit to invest $800K into Canada.
Now here’s is a twist. The immigrant is, if qualified, can actually borrow the $800K from a Bank and lend it to Canada. Even though the program is called the “Immigrant Investor Program”, it is actually not. The $800K is simply a LOAN given to Canada by the immigrant because after a period of 5 years, the $800K is returned to the immigrant. So the net gain to Canada is the interest amount that it supposedly would have paid on a 5 year Canada Savings Bond.
Last point, the Citizenship and Immigration Minister, Jason Kenney, has often said that Canadian Citizenship is “not for sale”. Given the mechanics of this program, it’s hard to reconcile the Minister’s statement with the reality.
I do however often cheer what Mr. Kenny has done so far in his department. IMO, he is one Minister with a “hard pair” of masculine glands.
[...] Flaherty’s Folly Kills Rosy Vancouver Home Buying Dreams [...]
[...] “History may look upon this pronouncement and call it Flaherty’s Folly. In the interim, many buyers will see it as more blood drained from their rosy dream of owning a Vancouver home.” – Larry Yatkowsky, Vancouver Realtor, yattermatters.com, 23 Jun 2012 [...]