Monday, January 17, 2011

CMHC insured mortgage changes

Full details here.

Here's the coles notes:
  • Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. The previous limit was 35 years.
  • Maximum amount Canadians can borrow against the value of their homes, lowered to 85% from 90% on a refinancing.
  • Federal government backing for home equity lines of credit, or so-called HELOCs, is removed.
  • Adjustments on amortization and refinancing limits coming into force on March 18.
  • Government backing on HELOCs will be removed as of April18.

Interesting that the Department of Finance is spinning this as a "savings" move for consumers.

From the DoF directly:

The new measures:
  • Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
  • Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
  • Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

These changes are actually more drastic than I'd expected. Especially on the HELOC side of things. IMO removing insurance on HELOCs is a direct hit on homeowner as second property speculator. Others will call that an abhorrent change that prevents people who can't manage their consumer credit from rolling their high interest debt into their homes. Because that's what a home is there for and all that...

I still expect a short term but subdued buying rush in the market. That may include a listings frenzy too as sellers try to sell before the rule changes in March. By mid-February I suspect there won't be a big bank in Canada still doing CMHC insured 35 year amortizations.

UPDATE: The effects of the mortgage rule changes will be felt in the sales stats. MLS numbers courtesy of the VREB via Marko Juras.

Month to date January 2011
Net Unconditional Sales: 144 
New Listings: 560
Active Listings: 3,007

Sales to new listings ratio: 26%
Sales to active listings ratio: 5%

January 2010
Net Unconditional Sales: 418
New Listings: 1,211
Active Listings: 2,793

53 comments:

Marko said...

Monday, January 17, 2011 8:00am:

MTD January
2011 2010
Net Unconditional Sales: 144 418
New Listings: 560 1,211
Active Listings: 3,007 2,793

Please Note

Left Column: stats so far this month
Right Column: stats for the entire month from last year

a simple man said...

CMHC should have never been involved in the HELOC side of things for anything but house-related renovations (does not include electronics).

I imagine there was a collective sphincter tightening at the Big 5 banks this morning.

Thanks for the numbers, Marko. Puts the latest "spike" in activity in perspective.

Leo S said...

It will be interesting to see if any banks do offer a 35 year mortgage after CMHC stops backing them.
If not, or if they do but charge a significant premium, we'll see what the true risk of that product is.

Also, how does this affect Genworth?

omc said...

January isn't a linear month for sales. It usually takes a few weeks for conditions to lift so that a sale appears. Not many sales happen over the christmas holidays. It is too early to tell how sales stack up compared to last year.

It will also be interesting to see if there is a flood of the financially ridiculous before the new mortgage rules take over. If these small changes have any effect on whether some one was to qualify for a mortgage; they certainly shouldn't have been considering it in the first place.

I guess this could also cause a small rush of listings with the fear that prices may drop a bit under the new rules.

HouseHuntVictoria said...

CMHC just got a wee bit poorer. The premium charge for extended amortizations just got halved. It's small (0.4% to 0.2%) percentage wise, but that's $800 on a $400K mortgage.

Robert Reynolds - GBA said...

I bet 35 years mortgages will still be available after the change, but only for people with 20% down (no CMHC), and I doubt that many people with that kind of down payment will opt for a 35 year though. I would also be interested to see what risk premium gets charged.

Leo S said...

From HHV's CMHC link: Remember: without mortgage insurance you may avoid the insurance premium but you’ll typically pay much higher interest rates and additional administrative fees.

Is this true? If you have a high credit rating (like 800+) and you put down 20+%, will you get a better rate if you still purchase CMHC insurance?

HouseHuntVictoria said...

Leo S,

Perhaps Lina will be able to answer that question. My guess is it's sales speak for the most part.

Just Jack said...

The changes to the Helocs will be the worst for cities that are house rich and income poor, like Victoria, will suffer the worst. The Helocs allowed parents to get down payments for their kids to buy. People that got behind in their payments could refinance credit card and other debts into their homes. Over extended home owners just lost a BIG tool to keep them out of bankruptcy.

Heres a scene from Meet John Doe. The first time I heard this, I thought Walter Brennan said Heloc instead of Helot, and I spit out my coffee.

http://www.youtube.com/watch?v=6WPkOp1XOgU

Alexandrahere said...

Here are my stats for the week of Jan 10- Jan 16.
SFH: Min 2 beds & 2 baths, priced between $375K & $775K in the core municipalities of Victoria, Oak Bay, Esquimalt, Saanich East & Saanich West.
New: 28
Sold: 12
P/C: 8
OM: 5
Avg & Med Sales prices: $558K
SFH within this criteria sold for 93% of original asking price. Of the 12 properties sold, 5 went for below BC assessment. Six of those properties were advertised having suites and one with potential.

Condos: Min 2 bedrooms, priced between $360K - $675K in most areas of Victoria, Esquimalt, Oak Bay and Saanich East & Gorge, Tillicum and Interurban areas of Saanich West.

New: 19
Sold: 3 apartments & one townhouse
P/C: 16
OM: 3

Two out of the apartments sold for under BC assessed value.

The avg condo price was 299K.

Just Janice said...

A late Christmas present from Mr. F - I expect boxing day will come in April...

Just Jack said...

CMHC had no business providing insurance for home equity loans to buy second homes, boats, cars and vacations.

Their policies drove up the price of homes and have caused a generation of first time home owners to be shackled with a lifetime of debt. A debt that some will never pay off. A debt that will destroy their future at renewal time when the interest rate is higher. As prices decline and they owe more than the house is worth, they can't sell as the bank will not allow them to. And they sit on this time bomb until it is triggered at renewal time, bringing down not only them but mom and pop who co-signed the mortgage.

Certainly no one held a gun to these buyers head and made them buy real estate. But these same buyers expected the government to hold to their policy changes. These newbie buyers have just become collateral damage.

If you had taken a 40 year mortgage a couple of years back, and have racked up more debt personal debt with the faint hope of consolidating the debt, like your friends had done in the past, you have just been screwed. There will be no HELOC's in your future until you've paid down a decade of debt.

I expect the lenders to be very busy for the next two or three months as every guy and his dog will be maxing out their lines of credit to pay off as much credit card and other debt as possible.

I am so glad, that I never bought. A tub of flaming oil would be too good for Flaherty and the other gangsters. But the one thing all governments will learn come the next election will be:

Never f..k with a man's castle!

phil said...

The mortgage changes may have some effect on the market after March, but I still think deflating commodities (gold oil etc) due in part to China slowing, will have a larger effect.

Leo S said...

New Mortgage Rules Will Bite

Rob Carrick: It's early yet, but I'm hearing from people in the mortgage business that it will be up to individual lenders to decide whether to make 35-year mortgages available to people who have a downpayment of 20 per cent or more.

HouseHuntVictoria said...

Leo S,

Many lenders are still doing 40 year amortizations. Just not with CMHC insurance. I suspect there will be 35 year ams going forward, just not insured by CMHC.

Animal Spirit said...

o.k. can someone who is more versed in economic analysis than I please let us know what the expected result of a marginal 7% decline in purchasing power will do the market (and over what time frame)?

My guess is that over time it would be a 7% drop in prices (or 35K on 500K). Then again, since the market is not rational, who knows.

HouseHuntVictoria said...

AnimalSpirit,

I wouldn't claim to have a good understanding of that kind of analysis.

At a high level though I don't think you can translate a 7% decline in purchasing power across 100% of the market. If we use Marko's stats of the types of financial situation Victoria home buyer's are in from the previous post, that 7% change in buying power only impacts less than 30% of purchases.

msr said...

Does anyone know what the terms of CHMC insurance are? Are there deductibles? Co-insurance? Poor Loan premiums? Waiting periods?

Marko said...

1870 Forrester sold for $575,000 in 2007.....now $529,900...assessment $627,000!

Talk about a haircut. I drove by it, looks good, double car garage, solid lot. Home is 1990 so insulation, vapor barrier, modern electrical and plumbing. Interior paint and tiles appear to be a hideous but that is much easier to change then to have to reno a 50s bungalow.

Reid said...

Animal spirit, my experience suggests that in areas where there is strong demand for housing in BC which includes Victoria, people will typically pay close to the maximum they can afford based on what the bank is willing to lend them. So a 7% drop in borrowing capacity will impact the amount first time buyers can afford to pay and this will have a negative impact the overall market. How much is hard to say.

I have a client in another community in BC where the buyers have been on strike since May 2008 and except for a few months since then buyer demand has consistently been 50% or less of what it was in 2006 and 2007 and early 2008. Now buyers in this town are convinced prices will just keep dropping and everyone know someone who has “lost” a ton of equity in their house, so potential buyers stay on the sidelines. Prices have been dropping at a pace of about 10% per year and so today prices are down 25%+ from May 2008 and there have been a few successful low balls well below that.

The difference between there and Victoria is the buyer demand. There seems to be a huge amount of interest to own real estate in Victoria. I was talking with a realtor who moved down from the Okanagan and he said the buyer demand in Victoria is so much stronger and this has made his job easier, more stable and profitable. The success of this blog is a testament to that buyer demand.

To have prices really drop we have to see the buyers stop buying like we experienced in late 2008, but it has to be more sustained. In late 2008 buyer demand was less than 50% of normal and prices started to drop off quickly, but as soon as buyers came back into the market prices went back up. So IMO to really see prices slide, we need lower borrowing capacity combined with buyers taking a long break from the market.

Mark said...
This comment has been removed by the author.
Mark said...

1870 Forrester sold for $575,000 in 2007.....now $529,900...assessment $627,000!

Personally I can't believe for the life of me believe that people think this house is in some crazy way good value.....it isn't even 1500 sq ft and IT'S OVER A HALF MILLION DOLLARS!

When does common sense start to factor into this???????? The problem is too many sheep perceive this like Marko as "good value" and that's why they keep on a buying.

I look at that house and think 250k or 4 times avg income is too much but more in line......of course what do I know.

What i do know is someone Coming in with 5% down is going to be carrying one hell of a mortgage for one hell of a long time to live in that house.

HALF A MILLION DOLLARS!!!!!!!!

a simple man said...

well said, Mark. I agree. I think people tend to lose perspective on how much money that really is.

Marko said...

"it isn't even 1500 sq ft"

This also shows that people tend to lose perspective on how big a 1500 sq/ft home really is...

I have a good friend in Italy that is an engineer for Bosch...lives with his mom and sister in a 2 bedroom 750 sq/ft condo.

Yes, 1/2 mill is ridiculous but housing sq/ft, heating, lot size, are also ridiculous.

Mark said...

Agreed Marko, 1500 sq ft is more than adequate I was also merely trying to put everything into perspective....

A HALF A MILLION (YES MILLION) DOLLARS FOR A 1500 SQ FT DATED RANCHER!

omc said...

When we are looking around, i find that 1500 sqft is a pretty good size in Oak Bay. 1500 sqft of actual living space that is. I don't include low height crap basements and converted attick spaces that you can actually only walk straight in, and straight out. You can't even do that with out banging your head if you are my size.

If we are going to use the European example (I am from Europe and actually lived there), I was in Italy and friends apologized up and down about having the guest room in converted attic space. It was much nicer than the garbage attic finishing I see around Oak Bay and was much higher in the center. I still couldn't do anything without bashing my head though.

If we look at actual usable, decent space the house sizes in the core area are often only 1100 sqft. I grew up in Europe, and this is pretty small for a house no matter where you live.

Lots of dreamers still out in this market, such as the one on Hazel st in Oak bay (1100 sqft shack). They are slowly coming down on the price, but other tiny 2 bed 1 bath houses in the area sell for $100k less than they are asking. For tiny shacks like this one it is very easy to know the value; it is all in the land as they are mostly dozed.

Just Jack said...

The last 500 sales in Victoria had a median house size of almost 2,100 square feet. So by Victorian standards 1,500 square feet is a small home.

Of course Italy has a different standard and so does Houston, Texas.

But we don't live in Italy or in Texas, so what they chose to live in has no bearing on us.

a simple man said...

my vote for the "insane in the membrane" pricing is 1955 St. Ann St.

Only about $250,000 overpriced...but I am sure they will haggle down.

Just Jack said...

I don't know if it's easier to know the value of these small homes in Oak Bay because they are closer to land value. Only because there are almost zero vacant land sales in Oak Bay.

If these starter shacks were selling at land value - wouldn't Oak Bay have a building boom going on? Only a handful of newer (after 2005) homes have been offered or sold in Oak Bay this year. Not exactly a hot bed of construction activity.

Obviously it is not economically viable for a builder to buy a starter shack, dump it, build a new home and sell it at a profit in Oak Bay. If it were - then there would be a lot more house construction happening in Oak Bay.

Besides its more of a sure thing, for builders, to build on two lots in Langford than one lot in Oak Bay.

At a half million and more for a starter shack in Oak Bay, you're not going to find contractors building on "spec" The home owner buys the land and the contractor builds on a cost plus basis.

I don't know if the higher price that you get for a new home in Oak Bay versus Saanich would fully offset the higher land costs. If it did, then you would see more "spec" building in Oak Bay.

At this point of the market you should be buying as much house as possible on cheap land. Which is the opposite of when prices are going up. When prices are going up, you should buy the worst home on the best street. Now you should buy the best home on the worst street. War shacks in Oak Bay should be crossed off your list.

DavidL said...

If everyone agrees that houses, condos, etc. are overpriced, then prices will fall. As long as the majority of the "buying" portion of the populace is will to pay current prices - then the current prices will remain stable!

It all comes down to how much it costs each month to pay the mortgage. In the early 1980's prices quickly collapsed when monthly payments doubled at mortgage renewal time. Recall that over two years, interest rates rose from 8% to 17%.

When interest rates are very low (as they have been for the past 3+ years), even modest increases in interest rates can have a profound change in the corresponding monthly payment. Assuming a 30-year amortization, a modest increase of 1.5% (5-year fixed rate adjusted from 4% to 5.5%) will increase monthly payments as follows:

$315K = $1500/month @ 4% -> $1776/month @ 5½%
$420K = $2000/month @ 4% -> $2368/month @ 5½%
$525K = $2500/month @ 4% -> $2960/month @ 5½%
$630K = $3000/month @ 4% -> $3552/month @ 5½%
$735K = $3500/month @ 4% -> $4144/month @ 5½%

A 1.5% increase translates into an 18% increase in monthly payments. Keep in mind that the modest 1.5% increase is in line with most of the current predictions by major banks and lending institutions for early 2012.

So what happens in a few years from now if rates climb to 7% (still well below the long-term norms)? This results in a 38% increase in the monthly payment.

How many people can afford an 18% (or worse yet, a 38%) increase?

omc said...

just jack,

I only include usable space in saying how big a house is. Low height crap finished basement is not true floor space. Neither is DIY attic space that you can only walk in the center of. If you subtract the garbage, most of these 40s bungalows in Oak bay are only about 1100sqft, not the 2200sqft as the scammers try to list.

There are many small 2 bed, 1 bath houses that sell in this area. One just sold one block away from that one on Hazel, in exactly the same part of the block. It is only 2 houses away in fact. A bit bigger, in similar condition, maybe nicer location. It sold for $550k. Another just sold in a slightly better location for $570k. The house on Hazel is worth $550k. Anyone who pays more is an idiot, but there seems to be some of those around. I don't think they will find anyone dumb enough to pay what they are asking though.

A Simple man,

Yup, that is a pretty crazy listing. There are still a few flippers out there looking at get rich quick schemes.

omc said...

I just checked and that house on Hazel is only 1000sqft on the main, with the rest in low height basement with almost no windows. The listing originally listed the basement as 6"4", but it has magically grown to 6'10". Most areas in Canada do not list basement, finished or not, as living space.

Leo S said...

It is funny how you lose all perspective when you stare at the market long enough. In our price range (<500k) sometimes I catch myself thinking "Oohhh look at this one, it's not a complete teardown! Maybe we should buy that!"

Then I have to remind myself the insanity of "not a teardown" being the surprising characteristic of a half million dollar house.

Just Jack said...

Too true Leo, I catch myself saying the same thing.

Introvert said...

Then I have to remind myself the insanity of "not a teardown" being the surprising characteristic of a half million dollar house.

It's only insane relative to most other places in Canada. Victoria is not like most other places.

Leo S said...

It's only insane relative to most other places in Canada. Victoria is not like most other places.

Yes that has been made abundantly clear ;)

Taigaa said...

You're right, we must remind ourselves that it truly is different here.

omc said...

I have an office mate who used to be a perma bull. He believed Victoria was special. He believed that real estate would only go up here; then he went to the states. A much different perspective now.

HouseHuntVictoria said...

Check this out:

If you use your RRSP to fund your down payment (Home Buyers Plan), there are all kinds of options for you.

Say you and your spouse have a combined $50K in your RRSP, you get qualified for a $350K mortgage and want to buy a place for $360K. You have to put 5% down, so $17,500. That leaves you with $32,500 in cash to do whatever you please. As long as you meet the requirements of the HBP, that tax-deferred money is as good as cash.

Insanity. A program meant to help people buy a home actually allows them to rob their retirement without an "equity" requirement.

Olives said...

Huh? Isn't one of the requirements that the funds have to go towards your down payment?

Introvert said...

I have an office mate who used to be a perma bull. He believed Victoria was special. He believed that real estate would only go up here; then he went to the states. A much different perspective now.

That's a nice story, but Canada isn't the United States.

It's not that I don't think real estate prices won't ever go down here; it's that I don't think prices will ever go down very much, and that, relative to most other places in Canada, our prices will always be much higher. If that makes me a perma-bull, then I'm OK with that.

Lina Zussino - Victoria Mortgage Broker said...

@Leo S Is this true? If you have a high credit rating (like 800+) and you put down 20+%, will you get a better rate if you still purchase CMHC insurance?

You will not receive a better rate if you purchase CMHC insurance.

Typically no buyer chooses to purchase CMHC if they don't have to. Maybe the odd person will... There tends to be a reason if a lender requests CMHC insurance on a conventional mortgage. i.e. second home, or location. As far as buyers trying to buy lower rates, that happens in the US not in Canada.

I'm interested to know which lenders will stick to a 35 year amort.

HouseHuntVictoria said...

Lina, is it true that there are still lenders offering 40 year amortizations, outside of CMHC? (as in if you have 20%+ down you can get a 40 year amortization if you want)

HouseHuntVictoria said...

Introvert,

Why is it different this time? What has changed in Canada in the last, say 5-10 years that suddenly makes our real estate more attractive than it was 15 years ago when we were discounted compared to elsewhere?

Lina Zussino - Victoria Mortgage Broker said...

@HHV is it true that there are still lenders offering 40 year amortizations, outside of CMHC? (as in if you have 20%+ down you can get a 40 year amortization if you want)

I personally haven't seen any and don't work with any lenders that do.

As a broker I have strict guidelines there is no grey areas. I have flexibility with rates and different types of mortgage products that allows to cater to just about everyone.

Introvert said...

Introvert,

Why is it different this time? What has changed in Canada in the last, say 5-10 years that suddenly makes our real estate more attractive than it was 15 years ago when we were discounted compared to elsewhere?


HHV, I'm not really sure what changed to make our prices increase so much so fast, but something sure happened! I believe it's sort of a self-fulfilling prophecy at this point: prices are high; people keeping paying high prices; prices stay high.

Some commenters touched upon this earlier: for prices to go down dramatically and stay down, prospective buyers would have to, en masse, refuse to make real estate purchases, thereby forcing sellers to slash prices in order to make sales.

Do you think this would ever happen in Victoria? Hell no. You couldn't get 5,000 Victorians to agree on anything, let alone to band together and refuse to pay exorbitant house prices.

Leo S said...

@Lina. Thanks, that's good to know.

@HHV. Wow, I thought it had to go to the house, but you're absolutely right:

Can I use funds withdrawn under the HBP for other purposes?

As long as you buy or build a qualifying home, and you meet all the applicable conditions to participate in the HBP, you can use the funds you withdrew under the HBP for any purpose.

source

@Introvert
If your line of reasoning was true, no bubble would ever collapse. Nortel would be trading at stratospheric heights right now, because after all, what are the chances of convincing all of those stock holders to sell?

Of course, you only need a small but increased percentage to sell to start the price declines. Once that is in motion the panic starts and the slide speeds up. Not saying it will necessarily happen like that, but it has happened so many times before all over the world, it's not as impossible as you think.

HouseHuntVictoria said...

@Lina, thanks.

I only ask because I saw this yesterday: link

HouseHuntVictoria said...

"HHV, I'm not really sure what changed to make our prices increase so much so fast, but something sure happened! I believe it's sort of a self-fulfilling prophecy at this point: prices are high; people keeping paying high prices; prices stay high."

I don't mean to start a never-ending back and forth, but you'd have to be living under a rock if you didn't know that house prices all across the western world pretty much did exactly this. With the exception of Canada and Australia, they've all hit tops and are working their way to some kind of bottom...

Why are we different? Or are we the same with different timing?

DavidL said...

@Introvert

Interesting rates are going up... They will continue to climb over the next few years. A decrease in real estate values will directly relate to the ability of mortgage holders to continue making their monthly payments. If payments increase to a point that they are no longer affordable, owners will sell. If enough owners try to sell, prices will slide down. It's all about supply and demand... no agreement is needed by 5000 Victoria residents.

omc said...

Well there was an agreement on one thing; emergency low interest rates and ridiculous amortization periods. The bubble started after 2004 when the lending rules were put to zero down and 40 years. No one disputes this.

This is changing; the amortization is back to 30 years with 5%down. Interest rates have only one way to go.

Introvert said...

Well there was an agreement on one thing; emergency low interest rates and ridiculous amortization periods. The bubble started after 2004 when the lending rules were put to zero down and 40 years. No one disputes this.

This is changing; the amortization is back to 30 years with 5%down. Interest rates have only one way to go.


We'll see how much prices do drop in the coming years as interest rates normalize. I'm quite skeptical that prices will "correct" in a significant way. That is, I think we'll never see anything close to pre-1994 prices ever again.

Just Jack said...

But Victorians "got together" and agreed to pay exorbitant house prices. Why couldn't they "get together" and refuse to pay exorbitant house prices?

S2