Rule changes too late?

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Tightening mortgage rules aimed at cooling Canada’s housing market “may have come too late” to prevent a hard landing.

The warning comes from Moody’s Investor’s Service, following last week’s announcement from Finance Minister Jim Flaherty that rules on government-back mortgages would be tightened to reduce the risk of a housing market crash.

“The government’s moves may have come too late, owing to the buildup in consumer debt that has already occurred,” Moody’s said in a research note Monday.

The changes included reducing the maximum amortization on a government-backed loan to 25 years, from 30 years and reducing the amount consumers can borrow against their home to 80 per cent, down from 85 per cent.

Flaherty had previous said the government would step in “if necessary” but Moody’s is concerned the government waited too long, making a soft landing difficult to engineer.

“Previous rule changes had some effect in countering the stimulus provided by historically low interest rates but failed to stop Canadian household leverage from increasing,” Moody’s analysts William Burn and Andriy Stepanyants said in the report.

In addition, slowing growth in household disposable income will be a challenge for consumers trying to pay down their debts, they said.

The changes would immediately cool home sales by requiring increased monthly payments, argue the analysts, and Canadian banks would benefit as borrowers keep more equity in their homes. The new rules would also lead to stronger debt service, creating an “equity buffer” and reducing the risk of unsecured credit exposure.

However, low interest rates encouraging borrowing were still a risk, according to the report. A Bank of Canada report estimates that a 325 bp rise in rates over the next three years would nearly double the number of households with debt service ratios of 40 per cent or more, from 11.5 per cent in 2011 to 20 per cent in mid-2015.

  • Jim A - Toronto and Durham Broker on 2012-06-27 2:56:43 AM

    I am so surprised that the government is making it very hard for people to get a home they need for themselves and their families. If you want to help then go attack the credit card companies, pay day loan companies, and high interest unsecured lenders. These are the venues of lending that need to be slowed downed. It is not fair that there is more and more restrictions on people looking to buy. This will not help the will only hurt them. Not everyone has 20% or 25% down and these are the people it is to hurt. Get real and focus on the real issues here and that is high interest lending giving anyone a credit card or loan and charging a lot.

  • Paul Therien, CENTUM on 2012-06-27 3:23:48 AM

    Jim, I agree with several of your points - Consumer Credit is a big issue. That being said, the government has no real jurisdiction over this form of debt. They are traditionally involved in mortgage and thus can regulate. Much more of a challenge for unsecured. The restriction for LTV is on refinances, not purchases. You can still put 5% down and buy a home. Can’t do 30 year am, but that should not make or break a deal if the customer is making a sound financial decision in the purchase of their home and not over extending to have the nicest place on the block.

  • Andrew on 2012-06-27 3:54:18 AM

    The consumer will adapt as long as they are given appropriate advise and counselling. Paul's comments about it being "a sound financial decision" ring true. Consumers will now realize that home ownership is not the "entitlement" it seems to have become. It is something that is earned. With sound planning it can be attained. Perhaps we need to focus on how to get those savings rather than simply how to spend the money. Our focus needs to be on what we can control and not on what is beyond our control.

  • Walid Ayoub BSc. MBA AMP Mortgage Intelligence on 2012-06-27 4:08:03 AM

    When was the last time a client approached a bank or mortgage broker and refinanced their home borrowed $200,0000 and then went and bought new cars and televisions and went on expensive vacations and dinner outings. My point is, usually it is the other way around. First people spend by buying consumers goods such as expensive cars, televisions, new furniture vacations using their credit cards,lines of credit,and bank financing or leasing for new cars and start accumulating debt, then they find out they are over their heads and have too much debt so they refinance their home at cheaper rate with manageable monthly payments thus avoiding a disaster. By making refinancing toughter on mortgages the Government is blocking the way out or removing the solution to a problem. Government should reduce the possibility of creating a problem in the first place by restricting financial institutions from providing unsecured credit beyond a certain level based on a person's income and other assets, similar to GDS TDS ratios used in mortgages. For example, if someone makes $50,000/yr and already have $50K in unsecured credit cards and lines of credit limits their application for additional unsecured credit should be denied unless they close another one. How? When there is a will there is a way, Govt can find a way to legislate this.

  • Ron Price / DLC Fergus on 2012-06-27 4:12:28 AM

    Jim, it's not about being fair. It's about the gov being in the back pocket of the banks. And it's not that the gov doesn't get it. They are well aware that unsecured lines of credit and credit cards at usurous rates and easy approvals are the culprit. So why don't they do something about curbing 'high cost' credit, it's because they are either 'afraid' of the banks or they are run by the know...part of the conspiracy theory wherein 'the few' really are pulling all the strings and/or they, like the banks can't help but maximize profits at the electorate's expense. While I'm at it, I would be remiss not to offer my thoughts on the new Collateral Mortgage Product all the banks have adopted. Bad news for consumers, bad news for our industry and bad news for realtors BECAUSE it allows the banks to 'control' the borrower, leaving them with few options, securing otherwise unsecured credit and having the ability to increase the interest rate 'at their discretion' all without the client's knowledge. We are fighting a war, and it does not look like even our industry as a whole is prepared to call a spade a spade, and tell the public how scary and potentially bad a bank C.M. can be to their financial help. Any broker who sends ANY BUSINESS to the banks is doing the consumer a disservice AND IS SHOOTING THEMSELVES IN THE FOOT.

  • Smith on 2012-06-28 3:25:33 AM

    People should go take a course and or go meet with someone who is filing for bankruptcy before being allowed credit. No one wants to take any responsibility for their decisions any more. Credit can be a wonderful thing when used responsibly. It's not to be used as found money. And it's not something you are owed rather something earned. I have used it to purchase my home as well as investment properties and not my dream vacation etc

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