In January of this year, Jim Flaherty, Canada’s minister of finance, announced that new mortgage and HELOC restrictions were to come into effect in March, 2011. The purpose of the new restrictions was to help curb consumer debt, which was said to be rising at an alarming rate. Over three months later, the real estate market has been hot, but affordability levels have dropped – probably as a result of inflation and continuously rising levels of consumer debt. So have Flaherty’s restrictions brought the stability he sought, or are consumers only sinking deeper into debt?
The New Rules
In an effort to reduce interest payments and to help speed up the process of building equity, Flaherty reduced the maximum amortization from 35 to 30 years for high ratio mortgages. To encourage homeowners to save more and stop borrowing against their homes, he reduced the refinancing of mortgages from 90% to 85%. Finally, the government withdrew their backing of HELOCs. This, in effect, made the lending institution responsible for consumer debt, rather than the taxpayer. Flaherty was quoted as saying, “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and futures.”
The overall impact
The Globe and Mail reported that CREA (the Canadian Real Estate Association) blamed the new rules for April’s reported slip in home sales (14%), when compared to last April’s sales. The association’s chief economist, Gregory Klump, said, “Changes to mortgage regulations that took effect in April, 2011, likely sidelined a number of first-time home buyers.” It should be noted, though, that the largest declines were found in the more expensive markets of Vancouver and Toronto. Klump says that it’s difficult to gauge the impact of the new rules when comparing the two months. “[April 2010] included the impending tightening of mortgage rules, speculation about higher interest rates and the looming introduction of the HST in some provinces. This year, additional measures to tighten mortgage rules were implemented in March and the other transitory factors were absent,” he says.
Some brokers suggest that there has been little to no change for the average homebuyer. Overall, they seem relatively unaffected by the decrease in amortization – in fact, it’s mostly seen as a positive change that can save homeowners money. What the new regulations have done is to eliminate first time buyers whose ability to afford a new home was tenuous at best, and real estate investors who can no longer afford to put down 20%.
Should we blame mortgages for rising debt?
Canada has always had a history of stringent lending policies, which is perhaps one of the reasons why we have coasted through this economic crisis relatively unscathed. Our neighbours to the South, on the other hand, are experiencing the repercussions of more lax lending laws. In fact, the US housing market has just suffered another double dip in prices – they have now experienced the most significant price declines seen since the Great Depression.
Statistics Canada’s most recent financial report states, “Mortgage debt advanced, partly reflecting relatively stable borrowing costs as well as higher housing resale and renovation activities.” But it also reported that the “ratio of household credit market debt to net worth increased to 24.0%, reversing the decrease in the previous year.” Household credit market debt is attributed mostly to credit card and retail debt, not mortgage debt.
While interest rates on mortgages are relatively low, interest rates on credit cards average close to 20%, and reach as high as 29.9%. This type of credit is easier to get. Credit card debt is easier to accumulate, but much harder to pay off. According to a recent TransUnion report, an “analysis of Canadian credit trends found that total debt per consumer (excluding mortgage) for the nation increased 4.5 percent in the last year” – on average, Canadian’s report $25,597 in credit card and retail debt. This begs the question, should we be so worried about mortgage debt, when credit card and retail debt is really the problem in Canada? Perhaps we need to focus on educating Canadians on how to manage personal debt more than we need to worry about adjusting mortgage rules.
Writer for RateSupermarket.ca