Big announcement today--we'd heard rumours on other blogs, but I couldn't find anything in Hansard, so waited until confirmation before posting on this one--the Feds have reduced the minimum down payment from 25% to 20% to qualify for insurance-exempt financing.
At first I thought, uh oh, this is going to heat-up the market. But after some thoughtful analysis, I'm thinking different. I actually like this move. We're likely going to wait out this market for a bit and attempt to sock everything we can away to make that 20% mark. On an average family home using the median, not average price ($470ishK), that's closer to $100K down instead of $150K down. Much easier to attain and saving $3K or so on insurance premiums will help with a month or two's mortgage payment.
So it may help us out. But really I think it's going to help out the market. And not help the market keep going up.
20% seems like a lot on the savings side, especially in our market here in Victoria. But the Canadian average home price is significantly less than here, so saving up 20% should be considerably easier. 20% market declines are not unheard of. We may see something like this when this market cycle corrects in Canada (not just Victoria).
But here's my logic for why I think encouraging people to save is a good thing: because saving makes people financially responsible. And when people become financially responsible they will look long and hard at the market before jumping in.
But it won't be just individuals doing the looking. Banks and mortgage companies will have to look at people's credit a bit more carefully too. Think about it: if I come in with $40K down on a $200K condo most banks will give me the rest. But if the market corrects and my condo drops to $160K--and in the ensuing recession (which often coincides with RE corrections) I lose my job--it may mean the bank is left holding a declining asset and a mortgage liability without insurance. They know this better than I do, so they may exercise significantly more caution in lending me the money initially. And if I don't qualify, then that means there is one less buyer.
I'm likely stretching my logic a bit too far. But overall, I think this is likely a good thing for returning some rationalism to an exuberant RE market. Of course, you can feel free to disagree with me in the comments.