Federal Government Gone Mad?
With Campaign promises of increased deficit spending to create infrastructure employment opportunities, one really has to wonder where our Government is going with its attack on Housing for Canadians, especially first time Home Buyers. The first move was to add a stress test to mortgage applicants that require mortgage insurance(less than 20 % down payment). This came with 2 weeks of notice, was that necessary, were we at the Brink? Could this not have been announced to become effective in 3 or 6 months so that the Buyers that were actively shopping would not have to loose 15-20% of their buying power, virtually overnight? It is a pretty tough adjustment to viewing $400,000 Homes to Buy and then have to change that price range to $340,000. Trust me, these are not comparable Homes in the eyes of a Buyer. As well, does it make sense to have the stress test be the "Posted 5 year rate" that is about 110% higher than the best rate you could currently secure? Again, could that not have been phased in over a couple time periods to allow Home Purchasers time to adjust to this new reality?
Next on the Agenda is this week's comments by Evan Siddall - President and Chief Executive Officer of CMHC, He is now suggesting that Household debt is dangerously high and that the CMHC cash cow of insuring mortgages may be at risk (as well as the public borrowers of course). He has explained that we should increase the down payment that buyers need to have more skin in the game(maybe they could lower the rate they charge to insure a mortgage down from the 3.6% of mortgage funds for a 5% downpayment purchase, to a more reasonable #). Canada's mortgage arrears rate in 2015 was .27%, compared with an after the crash rate in the USA of 1.67% in 2015. Really, are we in danger here? By the way, why do the Banks charge the same interest rate, even when CMHC is fully protecting them from foreclosures, you'd think they could charge less with 0 risk!
Lets take a look at household debt, are there other things that have changed to drive this outrageous number up. Glad you asked, how about the auto industry?? Prior to 2009, 50% of new autos purchased in Canada were actually leased, now that # is 10% for leases. So all of that new bundle of 40% of autos sold are considered debt, leases didn't qualify for that title. Maybe we should force the auto industry to have a minimum down payment with a reasonable interest rate on these rapidly depreciating assets that many find irresistible. In fact, negative equity has risen on auto trade ins by 50% in the past 5 years. There are 662 autos in Canada for every 1,000 people.
-How about Credit Card interest rates?
-How about PayDay Loans?
With a Canadian average Home Price of $482,000, how are new buyers going to come up with a 10% downpayment of $48,200 instead of a 5% down of $24,100?? This won't happen overnight. And while new Buyers are wrestling with trying to accumulate these extra fund, what will happen to the New Residential Construction? here are the numbers from the Canadian Home Builders Association for 2015:
Residential Construction Impacts 2016
$58.5 Billion in wages
$128.7 Billion in Economic Activity
Will a large part of this economic activity and jobs disappear? Is this the way to create new jobs(or keep the one we have?) What will replace these jobs, new bridges(for Canadians to sleep under?)
While some of these moves are meant to slow the Housing Sales and rapid rise in prices in Vancouver and Toronto, what happens to our smaller centres that have a well balanced housing market, in no danger of creating a bubble effect? By the way, the type of purchasers driving up prices in those two large centres are't buying at 5% down or worrying about stress testing their mortgage applications. It will only impact the Families struggling to enter a housing market and obtaining an asset that has a positive opportunity for appreciation in the long term.