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Should the New Mortgage Rules be Revisited?

8 September 2012

As of tomorrow the new mortgage rules will have been in effect for two months and, as predicted, they’ve had some impact on Canada’s housing and mortgage market. Those effects are just the ones that many with close ties in the industry feared; and just the ones that Jim Flaherty has hoped for. The reduced amortization periods on insured mortgages has kept many out of the housing market, especially first-time buyers. And while that might be a good thing for our skyrocketing debt levels, some think that once interest rates stabilize, it could be catastrophe for our housing market.

Craig Alexander of TD Bank was one of the most outspoken before the new mortgage rules came down, repeatedly saying that both Mr. Flaherty and Mark Carney, governor of the Bank of Canada should do something to cool the severely overheated housing market. Now that Flaherty has done his work, Mr. Alexander has also been one of the most outspoken in his praise about the new mortgage rules. Now, he’s just waiting for Mr. Carney to step in and do his part.

“Our models suggest that had the government not tightened lending mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160 per cent this year – the level that households in the U.S. and U.K. reached before sending their economies and housing markets into a tailspin,” said Mr. Alexander.

However, he also indicated that he doesn’t believe it’s enough. Right after the latest BoC announcement stating that interest rates would stay where they were, Mr. Alexander released another statement saying,

“Interest rates simply cannot stay at current levels indefinitely.”

But some think that would just be adding fuel to an already bad fire. Brian Hurley, CEO of mortgage insurer Genworth Canada, says that the reduced amortization periods have certainly had their effect, and that it’s keeping very qualified buyers out of there. Not a good thing for the housing market.

“These are pretty dramatic changes,” says Mr. Hurley. “I think we’re getting close to the tipping point. We see really qualified first-time homebuyers with very high credit scores now not meeting the bar because they can’t afford a 25-year amortization. These people should be getting a home.”

Eric Lascelles, chief economist at RBC Global Asset Management, agrees with Mr. Hurley saying that it is too much now. And what’s to happen in the future? If there’s anyone who disagrees with Mr. Alexander at TD Bank the most, it might be Mr. Lascelles at RBC. He says,

“I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized and 25-year-olds are being told they cannot make mortgage payments past the age of 50, even though they expect to work until 65.”

Which expert do you agree with? Are the new mortgage rules just what were needed? Or are they too much? Let us know what you think by Liking us on Facebook and getting in on the conversation!

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