Canadians Deserve More Answers

Boris-BozicBoris Bozic, CAAMP Chair and President/CEO of Merix Financial wrote this about the latest mortgage rule changes:

“…Stakeholders have every right to call out decision makers if there’s concerns that [mortgage rule changes] may have unintended consequences. We also have every right to ask decision makers to articulate, in a clear and cogent fashion, the rationale behind the decisions they made.”

As usual, Boris is practical and thoughtful in his commentary, and clearly right.

It makes you wonder, however. If people question policymakers, how much do they really listen?

Finance Minister Flaherty has been pulling puppet strings at will in the housing market. In doing so, he’s erased significant borrowing options and elevated short-to-medium-term housing risk, while providing only the skimpiest of details about his decision-making process.

The government professes it changed the rules to reduce Canadians’ interest costs, encourage equity accumulation and prevent overborrowing.

Those are seemingly worthy objectives. But economic and housing stability is hanging in the balance. Folks deserve more details on the alternatives to, and side effects of, Flaherty’s forced savings plan and retreat from housing finance.

Market share analysisFlaherty states his team has done the analysis. “We have lots of people who look at the numbers,” he says.

If so, the Finance Department should share its research on topics like:

  1. The potential risk to home equity that further borrowing restrictions create for Canada’s 9.6 million existing homeowners
  2. The alternatives to applying blunt rule changes on all Canadians, irrespective of borrower qualifications
    • Certain fringe borrowers needed tighter limits. But the vast majority of insured homeowners are unequivocally not a risk to the system.
    • Alternatives could have included limitations on the subset of riskier borrowers, enacting regional restrictions, talking the market down with warnings of future rule changes, letting supply catch up with demand naturally, or a combination of these.
  3. The lost economic output resulting from reduced real estate investment, consumer spending and housing-related employment losses:
    • TD Economics states: “While these new lending rules are not intended to severely impede household spending and housing demand, their impact will be substantial.”
    • Flaherty responds, “I realize it may have some dampening effect on the economy and I realize it may have some dampening effect in the residential real estate market.”
    • Meanwhile, the rest of the country waits for Flaherty to define the word “some?”
  4. The logic of imposing national rules for localized problems (like Toronto condo risk)
  5. The impact of tighter home buying rules on rental costs
  6. What sort of compounding effect these regulations will have if/when unemployment spikes or interest rates rise.

Interest rates, not overborrowing, are the #1 creator of excess housing demand. And interest rates can go up, believe it or not.

In a Globe story today, RBC banking head David McKay acknowledged this by asking: “…What is the longer term implication of all this in a higher rate environment?”

Canada’s housing market “…is like a big ship,” he says. “And it takes a while to turn. And sometimes if you oversteer, you can’t re-steer the other way.”

Yet, with the stroke of a pen, our public servants have changed our ship’s course and summarily eliminated financing choices, choices that are clearly beneficial when used responsibly.

When it comes to the decision-making process behind major housing changes, Canadians deserve more insight than a carefully crafted press release and a hurried press conference. Without such details, one might surmise that our well-paid officials have not fully contemplated the ramifications, or perhaps, that there’s something they don’t want us to know.

Rob McLister, CMT

  1. Most of the answers to these questions would be available from an access to information request. I’m not motivated enough to do it but perhaps someone here is.

  2. “We have lots of people who look at the numbers”
    I don’t think they looked hard enough. Since it adopted fixed announcement dates, the most the Bank of Canada has ever raised at one time is 1%. The new insurance and OSFI rules are like a 2% rate hike overnight. What kind of numbers people are so dumb that they can’t see the consequences of this?

  3. Let’s go over your questions one by one:
    The potential risk to home equity that further borrowing restrictions create
    The risk is created when prices outrun incomes and rent. I don’t recall you writing articles about risks when ams were lengthened to 30, 35 and 40 years with DP reductions. People worried about the risk to their equity can always sell and rent for a while. And don’t many on this board say it’s a home, not an investment? Funny how sentiment changes with the risk of loss.
    fringe borrowers needed tighter limits. But the vast majority of insured homeowners are unequivocally not a risk to the system
    The record debt-income ratios are averages, which couldn’t be just because of a few fringe borrowers. Record high debt combined with rising interest rates leads to default and deleveraging, which are risks to the system. Even before that point, the too-high house prices CAUSED by these borrowers is a risk to the system. Misallocation of resources into the housing sector is one of the ways.
    The lost economic output resulting from reduced real estate investment
    …was going to happen sooner or later anyway. The solution to a gross misallocation of resources is NOT to figure out how best to continue it.
    The impact of tighter home buying rules on rental costs
    Oh, here’s Rob McLister, friend of the renter! Maybe renters will be able to look forward to a new golden age where more landlords will be professional businessmen, rather than the accidental type, the quickie illegal basement mortgage helper type or the need some cash flow while trying to sell the property as a tear down type.
    Flaherty KNEW these new regs were going to be about as popular as a skunk at a garden party, there’s no monied special interest group I can think of which would benefit, he’s a politician, and he did it anyway. What does that tell you?
    As a stakeholder myself, I don’t know that Finance owes us any explanation beyond what’s been given. There’s been plenty of explanations, but those who earn based on rivers of cheap and easy credit just don’t like the answers. Our housing market has been scolded by the OECD, mocked by The Economist, and those of us who haven’t learned from recent experiences of other housing markets (cue a chorus of the It’s Different Here theme song) deserve their fate.

  4. You beat me to it Ralph. You had the right answers.
    Where was the talk of unintended consequences when Flaherty loosened the regs stupidly in the first place. All he’s doing is walking back his mistake.
    And misallocation of resources is a point few seem to raise. Haven’t we learned from the misallocation of too much money in any sector like in real estate and financial services in other countries. It happened to our neighbours down south and we’re in the eye of the storm in Spain right now.

  5. Boris:
    I agree; we need answers. The one question that I’d love to have the answer to is “why, given what we saw happening in the US in 2005-2006, did the Harper government choose to bring sub-prime borrowing into Canada via the back-door mechanism of 40-amortization and 0 down-payments.
    We’ll look back on this in 25 years as the dumbest economic policy mistake of this era. The mis-allocation of capital has destroyed our economy and has turned Vancouver (my hometown) into a wasteland. The average detached home is still over 1 million dollars and we no longer have a professional-sized live theatre company?

  6. Great smackdown Ralph… You are eloquent and insightful in your detailed rebuttal.
    Those who are truly concerned about the long-term stability of the real estate market (as opposed to the “fill your boots while you can” crowd) are commending Jim Flaherty for reversing his ill-advised policy which instituted 0% down, 40 year amortization mortgages.
    All others are simply whining about the punchbowl being taken away from the real estate orgy.

  7. Flaherty loosened mortgage rules in the first place, and this caused the bubble we are in now. I wanted the government to address this issue 4 years ago… now we are up a creek with out a paddle, just like all the other countries that went through before us.

  8. What other commodity is priced relative to how much you can borrow. Its WRONG.
    If I was selling a 20,000$ car 25 years ago and the monthly payments at 12% were 500$ does that mean a 500$ payment at 2.99% makes a 20,000$ car worth 90K

  9. Unfortunately, you’re confusing cause and effect. Amortization length by itself doesn’t cause risk Ralph. Unqualified borrowers cause risk.
    And rising interest rates by themselves don’t cause defaults. Unqualified borrowers and personal crises cause defaults.
    The economy is an incredibly complex system. But over time, and short-term exceptions aside, it always allocates resources to their best use. Forcing resources abruptly in a different direction without careful appraisal of the consequences is nothing short of reckless.
    Regarding the remarks about renter impact, you’re right, who am I to comment about renting, given that my wife and I, my mother, a sibling, aunts and uncles, and others closest to us rent? Your comment was obviously intended to be personal, but it was senseless. You don’t need to get personal to make a point in these forums Ralph.

  10. What’s the problem? MICs and credit unions were going to save the day? Home Capital Group is going to triple their mortgage book at the expense of the stupid banks?
    Get yer tickets here! Battle of century, watch mono-lines fight to the death over CMB and NHA MBS allocations!!!
    Tick, tock.

  11. he’s a politician, and he did it anyway. What does that tell you?
    It tells me he subscribes to two philosophies, “shoot first, ask question later” and “cover your a-s-s.”

  12. I am just curious, in Rob’s opinion what would be the best solution for the current situation? We are in deep s**t because of REA, banks, mortgage industry and so on. They profited from all this and now they would like to get out of this gently and without losses. Doesn’t work that way. “The deeper the valley the higher the mountain”

  13. You’re talking apples and oranges.
    A car is a commodity. A house is not.
    A house is a necessity. A car is not.
    A car is a depreciating asset. A house is not.

  14. Short term exceptions can last a long time. The only reason the economy thinks the best place for 5 year money at 3.19 right now is in the pants of a 26 year old couple stretching for a place in Surrey is that Ottawa is cosigning. That’s a market distortion, plain and simple.
    I’m no fan of many of the Conservative government’s policies, but I think you underestimate them when you suggest that they’ve made these moves “without careful appraisal of the consequences.” Heck, I wouldn’t be shocked if they tried to model it riding by riding! It’s just possible that they’ve concluded that this is a bubble, it might well have burst before the next election, so better to lance it now and hope prices are moving up again by the time they go to the polls. Or maybe not. At any rate, I’m certain they’ve put far more thought and research into it than I have. Remember, Flaherty was also responsible for the Haloween Massacre, another deeply unpopular move with no political upside.
    I didn’t mean for my comments about renting to come across as a personal attack, sorry to have offended you.

  15. Amortization length by itself doesn’t cause risk Ralph. Unqualified borrowers cause risk.
    Overvalued house prices cause risk even for qualified borrowers. Many perfectly qualified borrowers in the US were forced into financial difficulties and foreclosure just because the value of their home went down and their equity disappeared. It was not their fault, they were well qualified borrowers, they just happened to be forced to sell at the wrong time.
    Forcing resources abruptly in a different direction without careful appraisal of the consequences is nothing short of reckless.
    I agree, but you have to admit that drastically loosening the CMHC restrictions in previous years was just as reckless. Instead of loosening restrictions only on qualified borrowers, they were loosened for everyone.
    Regarding the remarks about renter impact, you’re right, who am I to comment about renting, given that my wife and I, my mother, a sibling, aunts and uncles, and others closest to us rent?
    Now that is interesting. I have never encountered anyone in the mortgage or real estate business that choses to rent except during transition periods.

  16. Investment or not, no one wants to lose money on their house. These rash changes will cause just that.
    Selling and renting is not an option. You can’t just flip a switch and rent to avoid loses. You’re talking about people ripping up their lives, moving and incurring transaction costs. That is simply not practical.

  17. “Yet, with the stroke of a pen, our public servants have changed our ship’s course and summarily eliminated financing choices, choices that are clearly beneficial when used responsibly.”
    The point is that they weren’t used responsibly, which is why we’re where we are now.
    Lengthening amortizations in the face of a near-zero interest rate environment has been an unmitigated disaster, by dramatically increasing the amount people were able to borrow along not one, but two vectors while the global economy and our own manufacturing sector are depressed?
    I usually enjoy your thoughts and insight, Rob, but I’m disappointed that you cannot see the ramifications of bringing this thin into line now and enduring some short-term pain, vs. allowing this thing to thoroughly implode as interest rates rise. Would you really choose the latter?

  18. A house is a necessity – Rent it… subsidized rent at this point helps.
    A car is a depreciating asset. A house is not. hahaha.. buy a 1905 house without any improvement.. does it exist anymore or the equity is ZERO? an 1905 car in good shape would be very expensive…
    BTW, tell the Americans the house is only going up in price:)

  19. Hi MiniMe,
    The government has more housing data than anyone in the country. With similar information, we’d all be in a better position to weigh the need for action and alternatives. Millions of Canadians will be impacted by these new policies. That’s why, as the story conveys, it’s important to better understand the true data behind them, as opposed to newspaper headlines and anecdotes.
    Based on the available information, many informed observers believe that more graduated policy changes would have been more appropriate. Some of those alternatives are listed in bullet point 2 above. This is our sense as well.

  20. Hi LS,
    Some fair points. My thoughts…
    Re: Amortizations:
    Well-qualified Canadian borrowers are in a good position to ride out a significant selloff. DBRS estimates average households could withstand a 40% drop. That may or may not be accurate but suffice it to say, an extra 5+ years of amortization isn’t going to tip most folks over the edge.
    With respect to your U.S. reference, do you know how many “perfectly qualified” borrowers were forced into foreclosure due to falling prices? I’d bet it’s a small portion of total foreclosures, and reflective largely of U.S recourse/lender enforcement practices (or lack thereof in some states), general personal misfortune and unemployment:
    Re: Loosening amortization:
    I wholly agree that certain underwriting practices, including the relaxing of insurance rules in 2006-2007, made it too easy for marginal borrowers to qualify. That was unfortunate and we, like most, support tighter restrictions on less qualified borrowers.
    Re: Renting:
    Something tells me Melanie and I are not the only ones in the industry that rent. :)
    For full disclosure, however, we do own commercial real estate.

  21. A house is not (a depreciating asset).
    I guess we’ll see about that in the next 1-5 years.
    Actually, long-term studies from Amsterdam (dating to the 1600s) show real estate rises at slightly above the rate of inflation…

  22. A minority of people misused mortgage flexibility while certain lenders, the government and originators let it happen. That is a fact. But this overextension of credit is easily prevented without constraining the financing options of responsible, hard-working and qualified Canadians.
    If you’ve been a long-time reader these viewpoints should not surprise you in any way. Our position has never changed. Risky borrowers should be restrained and borrowers presenting no material risk to the system should enjoy financing flexibility. This approach lets homeowners allocate cashflow to best uses, while still proving they can qualify for a home under conservative guidelines.
    As a side note, home prices have been stoked far more by falling rates and other supply/demand dynamics than by extended amortization policies. We also have to remember that risk is not determined by factors like down payment and amortization alone.

  23. Rob:
    I commend you for taking a stand on this issue. Full disclosure is the least we can expect from appointed officials.
    The Department of Finance has pulled the rug out from under the market and is answering to no one. There wasn’t even a public comment opportunity. At least OSFI provided that.

  24. Flaherty appears to have woken up one day on the wrong side of the bed and totally pissed-off that the real estate market in the GTA was still going strong. Apparently, the rest of the nation is irrelevant.
    Then someone must have whispered in his ear that the average Canadian’s debt to income ratio hit 152% and decided to “take action.”
    That summarizes the extent of forethought and rationalization that went in to the latest round of mortgage changes, unless I hear otherwise.

  25. It is an option for some. A relative of my wife’s friend is a successful lawyer in Toronto. He just sold his house for $2M – which is 3x what he paid for it 10 years ago. His plan is to rent for 3-4 years until prices fall back to normal levels.

  26. There is a school of thought that suggests a number of lenders have enjoyed substantial profits through consumer lending of all kinds – credit cards, lines of credit, residential mortgages. Let’s be honest; it’s easy money with a high margin and relatively low risk when you spread the risk over a large number of borrowers.
    Lending money commercially – small business owners who want to employ 12 people in some manufacturing capacity, the family restauranteur, the beauty shop owner – is way more risky. Yet the rewards of this risk are bountiful – increased employment, greater consumer confidence, higher domestic spending. Perhaps there has been a ‘misallocation’ of capital by focusing on the consumer where we really need to focus on commercial lending where the rewards accumulate across so many different aspects.
    Sure, construction generates jobs. But should we be looking at other ways to stimulate our productive muscle?

  27. One of the problems in the US was that lenders were handing out mortgages to anyone at rates below the going rate. These are the ones that should never have been in the housing market to begin with.(They would never have qualified up here in Canada under our guidelines) When their mortgage came up for renewal at the going rate these home owners could not carry the new monthly payments and walked away. As more of this happened, prices dropped and those who were qualified found they had less equity than before.

  28. An untouched urban 1905 house would be worth a fortune because of the land value. It would be in a prime location. The actual house, if untouched, would be a depreciating asset but the land would not. Land is where the real value of real estate is, not the wood, plaster and glass of the house.

  29. Told-you-so said… “The point is that they weren’t used responsibly”
    Some people drive 150 km/h on the highway. That’s pretty irresponsible as well, but do we take away everyone’s license because of the actions of a few? Of course not.

  30. “Effective April 19, 2010, […] is a new requirement that all borrowers must meet the standards for a five-year fixed rate mortgage, even if they choose a mortgage with a lower interest rate and shorter term. […] Also, both self-employed borrowers with more than three years in the same business, and all commissioned-income borrowers are now subject to new requirements in connection with providing income validation as part of qualifying for CMHC-insured mortgage loans.”
    To allow the customary piling in of the soon-to-be-not-so-well-qualified, the announcement was made on February 16th.

  31. @Robert McLister
    You have yet to identify F and OSFI’s concern, or, you’re just ignoring it.
    Hint#1: Who’s funding lenders and how will they return to private capital rates without going bankrupt?
    Hint#2: The BoC and all domestic banks have purchased and now hold 40% of all Canadian government/provincial bonds.
    Do we change course? Or do we set sail to become like Europe?

  32. “thoroughly implode as interest rates rise.” – That is the problem. When rates rise these new restrictions compound the risk of a housing crash and economic slowdown. What goes up must come down. The market would have corrected on its own just as it has 100 times before.

  33. @Canadian Watchdog
    The government’s concern about its housing exposure, and that of lenders and borrowers, has been well covered. More to the point, however, this debate is not about arguing against change. It’s about ensuring stakeholders understand the government’s logic and can hold it accountable. A change of course may be prudent given the circumstances, but it must be the right course, and Canadians have a right to question it.

  34. Overpaying for houses is a risk to everyone, just by itself. This is the lesson of every other already collapsed bubble that is staring you in the face, but no one here is able to see, which is entertaining at least.
    Your perspective may be consistent but a lot of your peers were arguing just a few years ago that the loosened rules were not a risk at all because mortgage applicants were not being qualified strictly on monthly affordability measures rather than total debt load because that would be irresponsible. Now the mantra is universally, hey, there is no problem with ballooning total debt because the monthly payment is manageable. Creeping normalcy, basically.

  35. If you want to rent, knock yourself out. 70% of people prefer to buy.
    Obviously prices don’t always go up in the short term, but they do in the long term. That’s a large reason why people buy instead of rent. Do you really need someone to explain something so obvious?

  36. What specific details/models would satisfy you? Maybe you should write a manifesto and submit it to TPTB. As it reads now, it feels like you just wish things were different. It would be great if they were different, as in, that this bubble never got blown in the first place.
    Speaking of disclosure of information that impacts the public, it would be great to see CMHC’s portfolio details published regularly: Vintages, credit scores, valuations, etc.

  37. “Flaherty KNEW these new regs were going to be about as popular as a skunk at a garden party, there’s no monied special interest group I can think of which would benefit, he’s a politician, and he did it anyway. What does that tell you?”
    Very, very poor political analysis.
    The regulations are very popular and supported by the vast majority of Canadians (and internet commenters) who accept the bubble-bubble-bubble frenzy hook, line and sinker without understanding dynamics of the housing market and and what causes risk.

  38. I believe the government took the right course in providing some dampening effects to the market. Anecdotically or otherwise it was evident that we certainly have some degree of bubble in certain regional markets; but reasonably one can’t possibly ask a Federal government to create specifically regional rules, that wouldn’t make sense.
    CMHC provides lots of very detailed publically available data on housing stats for those that want to look, some of which I have seen here on CMT.
    I suspect only time will tell with regards the actions that have been undertaken; but my sentiment would be that it has provided an opportunity for the market to slow down somewhat.
    It seems to me in many instance some folks will be put off their decision to purchase a little longer and enter the market. At the end of the day the three biggest threats to the mortgage market is Unemployment, The House Price/Affordability Index, and Interest Rates in that order, with first one being the largest threat and far outweighing the other factors. Now one could reasonably use this to challenge my assertions as a reason for the FEDS to do nothing; however the low rate regime and likely continued low rate regime means that folks may get fooled into a false sense of complacency, not unlike the person that referenced the BOC unlikely to move more than 1% at a time, if you are a rates trader you might want to make that bet; otherwise I will stay with my contention that Flaherty has made a reasonable move in what he has done at the margins.
    All in some great input and dialogue.

  39. “The regulations are very popular and supported by the vast majority of Canadians”
    Ya right. If you’re a home owner about to lose your shirt, they’re as popular as genital warts.
    What basis do you have for this “popularity” claim? I have yet to see a poll on these changes.

  40. Stakeholders aren’t even discussing fundamental problems, or even offering solutions for that matter. What do you expect the government to do? Wait?
    I’m always amused how brokers/borrowers don’t evaluate government balance sheets, as would a pension fund or large institution who intends to lend long-term. We’ve been lucky the spotlight has been on Europe for the time being; as ‘time’ is something the government is learning not to take advantage of in a financial market that goes from zero-to-sixty in no time.
    If the housing industry, or even the general public don’t understand the fundamental issues, then the government has every right to enact preemptive measures to prevent what could be an even worse disaster in the future. If it isn’t being discussed, then the latest round of criticism is nothing more then a cry for taking away the punchbowl.
    Tell me: Whose job was it to warn OREA about those futures assignment contracts it created, or warning developers about selling new homes on deposit structures?
    These are some of the flaws that had them worried about the state of the market.

  41. “As a side note, home prices have been stoked far more by falling rates and other supply/demand dynamics than by extended amortization policies.”
    Thanks for your response. My point was that prices have been stoked by falling rates *and* extended amortiation policies, which have thoroughly distorted supply/demand dynamics.
    It is precisely due to these policies that people are paying far more for housing than would be the case had amortizations not been lengthened in the first place, and as you’re well aware, higher amounts of debt amortized over longer periods of time in a near-zero interest rate invironment have left us in a very precarious situation as interest rates do eventually rise. This situation affects all borrowers, not just the “high risk” ones. It affects us as a society. As a society, having too much income flowing to financing RE leads to a reduced ability to invest in one’s own retirement, or one’s children’s education, or other productive investment opportunities.
    If you don’t mind, if you were Mr. Flaherty, how would you have addressed this situation differently given where we find ourselves today?

  42. emmi, No one here wants policies that encourage overvaluation. That’s not the point of articles like this. Moreover, no responsible individual measures affordability based solely on today’s rates, today’s qualification rules, etc. Mortgage suitability requires a lot more foresight than that.

  43. emmi,
    It’s not a question of satisfying one person. It’s a matter of providing 34 million Canadians with reasonable details as to (a) the potential economic and home equity risk of these policies versus the alternatives, (b) why all of these changes, as drafted and applied broadly, are a net benefit, and (c) whether the timing is optimal for all to be implemented at once.
    It’s been written here several times that many of the DoF’s and OSFI’s policies make good sense, even when applied on a blanket basis. Examples include the new GDS limit, conventional qualifying rates, cashback rules, etc. But not all of the latest rules can conclusively be called a net positive, and the timing is certainly debateable to say the least.
    Regarding further CMHC disclosures, I couldn’t agree more.

  44. Face it Rob, the bears won’t be satisfied until their shrill predictions of an all-out real estate crash come to fruition. No matter how draconian the policy measures have to be to achieve it.
    I’m not sure if it’s envy or anger that motivates them. Who cares.
    “A competent and self-confident person is incapable of jealousy in anything. Jealousy is invariably a symptom of neurotic insecurity.”
    ~ Robert A. Heinlein

  45. The government should set all home prices. Great thinking emmi. God forbid people overpay. Let’s cut amortizations to 10 years without delay.
    Do you realize how ridiculous some of you people sound trying to dictate home prices?
    If mortgages are correctly underwritten, the real estate market will safely regulate itself. When supply exceeds demand and prices get too stretched, prices come down. I know this is a hard concept to grasp for some of the fanatics here, but that is how markets work.
    Canada doesn’t need new rules. We need the existing rules enforced.

  46. CW, Your post seemingly suggests that only government and housing critics know best, and that only they are discussing and grasping the fundamental issues. If that’s what you believe then this discussion is no longer a productive use of time for either of us.

  47. As a homeowner to another homeowner – I’d like to tell you a story about a close friend of mine. My friend was great at installing flooring, in fact he was so good at it that that’s what he decided to do with his life. He was fast, thorough and did an incredible job. My friend got married and moved down south… as we know, the market turned a bit sour… he soon realized that installing flooring was all he was good at. He spent years searching for employment. His wife kept her position as a nurse so it was best to stay there.
    The point is this: you’re going to have to dig deep in your little toolbox of talents and try to find something else you can do with your life, Appraiser. I sincerely feel bad for you that you are out of options and wish you the best of luck on your journey to finding new employment. But for us homeowners, who have real jobs, and who do not rely on home equity for our future, your desperation is making us look bad.
    Best of luck in all your future endeavours, Appraiser. Like it or not, it’s bear territory for a minimum of 10 years.

  48. Well-qualified Canadian borrowers are in a good position to ride out a significant selloff.
    You are right of course. I don’t think anyone is worried about the well qualified borrowers. It’s the less qualified ones that are the problem in every housing correction.
    With respect to your U.S. reference, do you know how many “perfectly qualified” borrowers were forced into foreclosure due to falling prices?
    No, but with something like 1 in 5 borrowers underwater, I assume quite a lot of them were well qualified when they bought. So when the normal life events happened to them that forced a sale, some of them would be forced into foreclosure.
    But I have no hard numbers.
    Something tells me Melanie and I are not the only ones in the industry that rent. :)
    For sure, but it is quite out of the ordinary. :)

  49. The government has more housing data than anyone in the country.
    I look forward to a time when this is not the case. Any decision so important should have all the source data made available to the public, and the detailed reasoning behind the decision.

  50. So what’s your explanation for these policy actions? The government is just a bunch of chicken littles?
    Be serious. You think these changes would have happened if they hadn’t done the analysis and concluded that there is a problem?

  51. If the real estate industry can safely regulate itself then why do we need taxpayer backed insurance? Let the risk fall exclusively on the lenders if that is true.
    All this discussion over returning to policies that were considered the norm for most of the last century. Yet none when all the policies were being relaxed. I saw a nice chart showing the growth of home prices, income and debt growth. Anyone care to guess whether income or debt growth paralleled home price growth?

  52. It is rude baseless posts like this that give you bears a bad name.
    Appraisers don’t have real jobs? Really?
    Here’s news for you Kid, and I emphasize the word “kid” given the immaturity of your post. Appraisers are needed in all markets, up or down. With OSFI starting to emphasize human appraisals, appraisers will be in higher demand than ever.

  53. One can really feel the emotion in these posts… wow if we got everyone in the same room it might get ugly…
    So back to the primary scope of the article; Should or shouldn’t the DOF provide more explanation for the recent policy changes made, and the way they were implemented?
    Interesting question and leaves many great debatable sub-topics:
    -Does full transparency ever exist?
    -If there were some scary signs available only to a select few at DOF and they were shared publically would the rumors alone poison the housing industry?
    -Did TD’s past plea to have government intervention have more to it than we know?
    -Undoubtedly most of the CMT readers could stomach all (if any) scary symptoms of what ever made the DOF take this kind of action… but how many Canadians are actually financially & media literate enough to read between the lines?
    -If Flarety crashes the housing market on purpose will it allow him to more easily persuade Canadians to agree to Oil Pipeline policy as the Saviour to the economy?
    -Or is all this hype over-rated and housing stability just around the corner?
    Great article Rob keep them coming…

  54. Loosening rules wasn’t the problem. Giving the masses access to looser rules was the problem.

  55. Then let’s leave it to the government to decide when, what and how and let’s not ask for answers to questions formulated based on less data than the government has.
    You should assume that the government knows more also when they decide to do something that you might not fully understand based on “the available data”.
    So on one side “data publicly available” is not enough so you could take a stand, but on the other side the same partial data is just good to formulate requests when the situation is not in your favour anymore.
    This is quite close to double standards.

  56. 77QW – For the record, I consider myself neutral, not a bear. I own my home. I am here right because I clicked a link from Google News
    I sensed desperation that this is all Appraiser really has… I thought Appraiser was just his screenname, and not his job. Oh ya, you’ll be fine with your appraising job. Nothing to worry about here. My intention was to give the poor guy some encouragement because it sounds like thats what he needs. I’d say some other housing employment might need to stand guard, but appraisers won’t be affected at all. You’re right, 77QW

  57. This is a political slam-dunk. And that’s all it is inteded to be. This move is popular with three groups:
    – existing homeowners that are worried about a bubble and think everything is unaffordable considering house cheap houses were in their day
    – aging, soon to be downsizers who want to sell their SFH (the market for which is less affected by these changes) for condos (mroe affected) without using almost all of their equity on the new condo
    – newish homewoners that already used the 40/35/30 flexibiltiy to get into the market
    – soon to be homeowners that want to get into the market but thinks everything is overvalued and unaffordable
    Essentially, this will be unpopular with speculators, super-marginal homeowners, and some mortgage professionals. This is a tiny voting bloc, and those in this bloc that vote Conservative might be cranky but they’ll still likely vote Conservative regardless.

  58. These recent changes are indicative of moves this Government has made in many areas of governance. All you have to do is look at the recent omnibus bill which not only brought in a budget but change everything from environment rules to unemployment insurance to retirement age. This is not a thoughtful government no matter how their attempt to mask their moves in unsubstantiated rhetoric.
    A couple of days after Mr Flaherty announced changes that he had said only months earlier he would not do, a client came to me with a severe debt problem. Now quite frankly these people could not be assisted before the changes as they had dug too deep a hole in their home’s equity. However in examining their situation I saw that a major Canadian Bank’s car loan subsidiary had approved a $45,000 car loan just months earlier even though the client showed recent over due payments up to 4 months as well as outstanding collections. My advice was return the car and put the home on the market as soon as possible.
    What is Mr. Flaherty doing about that type of situation. I would suggest very little as it would take a very thoughtful and measured approach something this government lacks in most of it’s dealings, ie lets use the housing industry to keep the worst effects of the recession at bay … oh my god look at what is happening to the housing industry lets use mortgage rules to create a road block to the housing industry.
    Can our economy survive 3 to 4 more years of this thoughtful approach ?

  59. The fact that RE industry insiders are complaining about the new rules means they’re working.

  60. Once again you are totally off base.
    Existing homeowners worried about a bubble sure as hell don’t need one more thing to push their house into the abyss. I have not found any existing homeowners who like these rules. Most people are worried stiff about what they’ll do to their equity.
    Secondly, rising condo prices are not an issue for downsizers. These are people who have already built up offsetting equity in their existing home.
    New buyers are the only ones who may be upset, and they are a small minority if you compare annual first-time sales to existing homeowners.

  61. You have unwittingly caught yourself in a web of contradictions MiniMe. You’re telling us to trust the same government that created the very rules you’re complaining about.
    But government is always right, right?

  62. Yes because we should all take financial advice from a government that’s $586 billion in debt.

  63. It’s funny how there was no such public outcry when there was a quick buck to be made, yes.

  64. It seems to be working very well in Vancouver. June house sales were the worst in twelve years.

  65. It seems to be working very well in Vancouver. June residential sales were the lowest since 2000.

  66. I may be wrong, but whether its CMHC or another insurer, doesn’t the borrower pay the costs of insurance to the bank either way? (Either be in through a higher interest rate or some other cost?)
    Try and put 45% down on a home today and see if you can get the magical 2.99% 5yr fixed.

  67. Those of us that own are about to lose the savings we’ve built up in our homes and be banned from refinancing high interest debt. Yep. These rules will work just great.

  68. -Does full transparency ever exist?
    No. Governments typically have different motives when they announce a policy change than their stated objectives. This holds true for housing as much as it does any social program.
    would the rumors alone poison the housing industry?
    Flaherty’s damned if he does, damned if he doesn’t. If he gave the reason “because housing is overvalued” people would shriek that he’s poisoning the housing market. If he gives broad statements as he has recently, people are left to speculate. Option 2 is obviously safer politically.
    -Did TD’s past plea to have government intervention have more to it than we know?
    Does it really matter? The deal is done.
    how many Canadians are actually financially & media literate enough to read between the lines?
    Probably not many.
    agree to Oil Pipeline policy as the Saviour to the economy?
    Nonsense. Pure conspiracy theory.

  69. Whether we like the new rules or not is beside the point. I think this article has a reasonable premise. Taxpayers deserve to know if our politicians are making the right decisions. Greater insight into the thought process of policy makers is never a bad thing.

  70. No, the free market knows best, and just for the record I would have preferred no rules imposed. But can we really have a free market? Would the government allow a large bank or CMHC to fail should the market turn badly? No.
    Solutions in practical terms and understanding the market is non-linear is what parses industry from government thinking.

  71. “Those of us that own are about to lose the savings we’ve built up in our homes”
    not the case, if you had a $500,000 mortgage and actually “saved” $100,000 and “built up” your mortgage by that amount, then you’ll still have a $400,000 mortgage at renewal….it’s just that crazy paper value that’s coming down, pretend it never happened.
    “and be banned from refinancing high interest debt. Yep. These rules will work just great.”
    how can you be building up savings in your home, yet incurring high interest debt…you’re doing something wrong, pay off the high interest debt with your savings!….oh was that just a paper gain?

  72. Be honest though. If you bought a few years ago, most of the equity in your house is not from your savings, but from the appreciation of your home. One of the main drivers of that appreciation has been government loosening restrictions on CMHC lending.
    So you should thank the government first for the equity you have, before cursing them for potentially taking it away again.

  73. Built up savings in your house? Try inflated prices brought on by an industry who encourages people to finance their lives away. The equity you have is from the market pushing up prices, not from anything you’ve done yourself.

  74. Please explain why it doesn’t make sense to tighten rules just in cities that need them? Bureaucrats are doing the exact inverse by tightening in cities that don’t.
    We sure as hell don’t need more borrowing restrictions in Lethbridge, AB. It’s so irresponsible for Flaherty to kill prices everywhere just to fix problems in Toronto!
    With rules like this I finally understand why Quebec wants to secede from the federal government.

  75. You’ve all had a free lunch at the expense of a fairly priced, stable, independent housing market. CMHC shouldn’t exist at all – there’s no reason that taxpayers should take on risk that banks aren’t willing to.

  76. “The equity you have is from the market pushing up prices, not from anything you’ve done yourself.”
    This is the lamest argument I’ve heard yet. Do you say the same thing when you buy a stock that goes up? Of course the market moves prices. For families who made a conscious decision to buy, that doesn’t make the equity any less theirs.
    By the way, blaming “the industry” for rising home prices and ignoring the real reasons – like interest rates – just makes you look foolish.

  77. I am not saying that the government is always right. I am also not complaining about what they did, on the contrary. You are subtly deviating from my point.
    Please read again

  78. It doesn’t matter why prices went up. If you take a risk to buy an asset, you have earned that profit. Period. If buyers took no risk then I would agree with you.

  79. See above answer to LS.
    You’re implying that peoples’ losses don’t matter because you don’t like the reasons behind price increases. That is just childish.

  80. And you’re implying that you “own” the gains because you invested wisely, but that the losses belong to someone else who changed the rules that you initially benefited from.
    You have every opportunity to lock in your gains now with the foresight that the rules will change shortly. Sell and stop whining.

  81. I agree with you, transparency is important in government. Were you calling for more transparency from CMHC before when they were raising amortizations and lowering down payments? Why start making those demands now, but not then?

  82. It doesn’t matter why prices went up.
    It clearly does. When a large part of the reason that prices went up is because of easier and cheaper credit, then you shouldn’t be at all surprised when prices go down as credit is tightened again.
    Not saying you shouldn’t be annoyed, but you have no right to expect the government not to take away what they have so recently given you. If they had not loosened the rules, you wouldn’t have a lot of that equity to start with.
    Are you mad when the stock market goes down after a big rally? Is it somehow your right to protect your profit? Of course not. If you want to protect the profits, sell the asset before it declines.

  83. Wrong.
    What’s done is done and you can’t change history. Stop dwelling in the past and focus on the now.
    We have every right to expect leaders to not risk our home equity. We all want a soft landing but these rules may trigger a crash instead.

  84. Only two things are certain in life:
    1) A financial plan built only on home equity and credit card debt cannot be saved by anyone
    2) It will be blamed on the government eventually

  85. >> What’s done is done and you can’t change history.
    You’re right. These rule changes are now history. They are done and done. So why are you still dwelling on them?
    >> We have every right to expect leaders to not risk our home equity.
    I don’t agree. You had no right to expect the government to increase your house value like they did when they loosened CMHC restrictions.
    Very similarly, you have no right to expect them not to tighten those rules again.
    Ideally they would have kept their heavy hand out of CMHC, but they didn’t. Now we pay the price.

  86. Nothing is done forever. Once these rules and higher interest rates do their damage, voters will give Flaherty his walking papers. Then we’ll get a new government that hopefully has the sense to repeal some of these equity destroying regulations.

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