How many times have we heard analysts imply that home sales will bounce back from mortgage rule changes within two to three quarters? This has been a common assertion from people who downplay the consequences of the July 2012 mortgage rules. But one man says that it’s an argument not grounded in fact.
“I think economists have just totally misread what the numbers are saying to them,” housing analyst Will Dunning told CMT.
Dunning says the data suggests that sales dropped after the April 2010 and March 2011 mortgage rule changes mainly because rates increased. The tighter qualification rules were far less contributory.
Sales then improved after each instance, largely because mortgage rates decreased. Again, stricter lending rules were a small factor.
“I have a second piece of data that nobody else has, which is my mortgage database,” adds Dunning. “It tells me that the prior (policy) changes had a negligible impact on qualification…”
In a comment he made on the Globe and Mail website, Dunning said, “the policy change that took effect last July was not accompanied by major moves of interest rates” but it had “a huge impact on the number who could qualify.”
As a result, he says the 2012 change was “the first one that had a material effect on the housing market. That impact has now lasted for eight months and…will continue to be felt for some time.”
Dunning expects housing-related employment to take a dive, with as many as 190,000 jobs being lost through 2015. “Ottawa is getting more than they bargained for,” he adds, and the worst economic impact may be yet to come.
“Slower sales will translate into slower housing starts with the impact felt in the second half of this year. The reduction in housing starts will be much larger than anyone is expecting.”
Rob McLister, CMT
I think there is room for rates to drop futher. Maybe that will cushion the fall once again.
Totally agree with you Will, for zeroing in on the issue of mortgage qualifying as one of the key factors, if not the primary one since the new mortgage rules announced in the summer of 2012. It’s too bad the Minister of Finance / his analysts do not see their policy induced cause and the resulting effects all these months since last summer – and reverse their policy – to help first time buyers qualify. How much proof do they need ??
As challenging as the new mortgage finance guidelines introduced may be, it has allowed the industry to better advise clients of their financial budgets and prepare for future expenditures.
Given that the whole point of the rule changes was to slow the housing market, why do you think the government would reverse course now that their regulation has had exactly the desired effect?
The “desired effect” – how much job loss is desired by Minister Flaherty? During 2014 he’s going to get much more economic damage than he desired.
>> During 2014 he’s going to get much more economic damage than he desired.
Obviously Flaherty didn’t “desire” economic damage, and painting the regulation changes with that brush is not fair as I’m sure you know.
Certainly they expected a hit to the economy. Is the slowdown bigger than they expected? That’s impossible to tell unless you are privy to their internal forecasts.
As you say, the last three tightening actions were not effective because they were undercut by falling rates and new lending options by banks. This one finally was effective, and I doubt the government is interested in reversing course unless the downturn really picks up steam.
Quote: “Obviously Flaherty didn’t “desire” economic damage”
Flaherty said himself that he wanted home prices and sales to fall. That by definition causes economic damage. Obviously these repercussions were a side effect he was prepared to live with. Unfortunately the side effects might kill the patient.
I agree with all the comments, but would like to add that the impact I am seeing is on refinances. The lowering of the LTV to 80% is definitely having a negative effect especially on people who purchased at the peak in 2008. Prices have still not come back to those highs in many areas.
If all the jobs in the country were in the housing sector then a 90% job loss in that area would be very desirable to get to a more balanced economy. Just like natural resources, if it starts to offer too many high-paying jobs then the rest of the economy is little more than a hollow shell. And given that both of those markets are very cyclical and dependent on people outside the current population, the jobs may be highly paid but they aren’t high quality.
Flaherty said himself that he wanted home prices and sales to fall.
Yes. As you say, the primary motivation was to calm the housing market. The economic damage is an unavoidable side effect. Clearly Flaherty believed that some economic damage now would avoid more economic damage in the long term. Remains to be seen if he is correct and damage can be contained.
There is nothing to replace high paying construction jobs in this country. NOTHING.
Sorry, but it isn’t clear to me what your “therefore…” might be.
What I am saying today, and I have been saying for some time, is that the damage is going to be substantial. This is just getting started.
Therefore job losses are desirable if the industry has recently been more active than our long-term needs. Trying to force the level employment to remain higher than what we need will just cause inflation in what is a fairly large expense already for most people. Wealth comes from productivity (or from the ground) and productivity = less jobs.
One person’s gain is 5 other peoples’ loss if we try to protect unnecessary jobs, not to mention the effect that would have of drawing people away from other industries that will actually make the country and the economy internationally competitive.
The only people grumbling about the rule changes and their impact are real-estate agents and folks who work in the mortgage financing industry. These are the only folks who benefit from a housing bubble. They just want to get their cut, and right now, later consequences for the larger economy be damned. And by-and-by, they are also the ones who inject fraud into the system to help fuel the bubble.
What we need now, in my opinion, are even more stringent rules to reign in the housing market. Yes, sales are down at the moment, but if you take a closer look, you will notice that average house prices in places like Toronto are still way ahead of average income. That is not good for the long-term health of the Canadian Economy, and that kind of imbalance has only one logical conclusion: a US-style housing crash. People should not be spending an indecent percentage of their income to pay for the roof over their head.
So would you rather have a minor correction now, or would you rather continue to fuel the bubble and have a full-blown crash in the Economy a little later?
Me, I love the rules. First-time buyers are actually having to save before they can buy a house! What horror!
And second-time buyers are having to make more prudent decisions, instead of just banking on the continuation of an ever-exploding bubble in house values.
Also, speculators and flippers now have to put their own money where their mouth is!
So the rules are now forcing everyone to become more fiscally responsible. What’s not to like? More rules, please, we need a correction in prices, not just a correction in sales activity.
There is a flaw in your argument. If demand is constant and prices are too high, then supply is too low. If supply is too low then industry jobs are needed to correct that.
I would also add that killing housing jobs doesn’t make other jobs just sprout up. We are losing our industrial job base and there are only so many resource and health care jobs to go around. There are no other industries to “draw” people away from, unless you think Tim Hortons jobs are going to make Canada internationally competitive.
@Summadom
What a dogmatic and factually deficient post. I stopped reading after your fraud accusation but I suspect the rest of your post was just as narrow-minded.
From a social policy perspective what is the correct homeownership target, 60 percent, 70 percent, 80 percent….. Why is this even a matter of social policy… By this logic what should be the social policy on family form and formations….stimulus for more marriages, sooner marriages, more and sooner children, more or less population, more or less immigration…shouldnt this be left up to the markets , people and the forces of society….rather than skewed by government social policy targeting a fictitious and contrived number… It games the system, for no apparent good. I say get the government out of banking.. And tax payers stop backstopping the liability (cdic) and asset (cmhc) sides of their balances sheet, which just offloads risk, skews the workings of the market and pricing, and creates moral hazard.
Following your argument to its logical conclusion, given that personal income has been relatively flat since the Conservatives have taken power, does that mean house prices should have remained flat? Then why did they go up at all?
Oh yeah – I remember. The stock market collapsed, the bond market tanked, the industrial sector was decimated by greed and outsourcing to China and India, job losses were escalating, and investors had one place to put their money – real estate. Demand went up, supply evaporated, and smart investors sold their holdings when prices peaked.
Let’s look at some things not in Mr. Dunning’s report – the spin off effects. Housing starts are off – construction jobs are lost. Considering they account for 9-11% of the labor market in a stable economy – and peaked at 11% during the recent boom – any loss of construction jobs is serious and will require government stimulus in the form of infrastructure investment to restart the economy. Hard good orders are off – appliance and furniture sales are down so jobs will be lost there as well. How many that will be is yet to be determined. Bank branches will not need the same number of staff to serve the people who are not working so the financial sector will take a hit. And so on the spillover goes.
Did Mr. Flaherty expect what is about to happen? I don’t think so. This government is a minnow on the global stage; but this I can tell you – we are heading into a global recession caused by the Canadian government. Construction is down, manufacturing is gone, the resource market is far too cyclical to depend on. Thank you, Stephen. They just don’t get it!
Real estate agents and mortgage people are the canary in the coal mine!
“I have a second piece of data that nobody else has, which is my mortgage database,” adds Dunning. “It tells me that the prior (policy) changes had a negligible impact on qualification…”
This is exactly why the Government kept cutting mortgage rules. Previous cuts did not have the desired affect they wanted. Now the mortgage rules are doing what they wanted.
The consequences of doing nothing was that we were ( or are in )heading into a huge debt bubble, that would have had disastrous results. We are not the US, but with many fundamentals worse the US at their peak, the last thing this country needed to do was find out how bad a Canadian debt fueled bubble would affect our overall economy.
What I believe the Feds have been trying to do is create a “soft landing”. Not only in house prices, but household debt. They know that there will be collateral damage ie job losses in the real estate and related industries. But by introducing the rules in 4 different periods of time, they hope and we all hope, that the negative effects will be minimal compared to what the would happen if there was no tightening.
Yes, there are most likely other ways they could have implemented mortgage rules. I believe they could have left amortizations at 30 or 35 years and given consumers the choice. Where I believe they should have really cut mortgage rules is the Gross Debt Service ratio. If this country has a retirement and savings problem,and it does, cutting the ratio back to 39% was a start, but there is definitely more room to cut. Before 2007, the GDS ratio was 32%. Getting back to the 32% ratio would be prudent, and it would give Canadians on more option to get out of this “retirement crisis”
Summadum,
Let me count the ways your ignorant generalizations are wrong.
1 – Insinuating that the real estate industry promotes fraud establishes you as a cynical extremist with zero believability and an axe to grind.
2 – Real estate people aren’t the only ones speaking out against the excessive rule changes. Add to that 10 million households with equity at stake and tens of thousands of Canadian workers about to lose their jobs.
3 – As someone in the real estate industry I can tell you that NO ONE I know wants a bubble. I for one would welcome a normal correction.
4 – Inflicting more stringent rules while the market is correcting courts economic disaster.
5 – The market doesn’t need to plummet to correct. Fundamentals can catch up to flat or slightly declining prices.
6 – Sorry to disappoint you but a US style housing crash won’t happen in a country without US style risk characteristics.
7 – People pay the same percentage of their income to put a roof over their head today as they did 30 years ago.
8 – Down payment size alone does not determine the quality or prudence of a first-time home buyer.
9 – Making property investment harder raises costs for renters. It all comes out in the wash somehow.
“we are heading into a global recession caused by the Canadian government”
JSydneyH, your hyperbole discredits your entire comment.
Do you honestly think Canada is influential enough to cause a global recession?
“Watch out for the next Great Depression! Norway is running out of fish!”
First-time home hunters are not very good savers. Not only do they want a home, they want all the electronic toys as well like huge TV’s iphones, and the latest gadgets. Whatever happened to sacrificing some pleasures in life to really get something you want. Some will never achieve home ownership for this reason.
Another part of my argument (which I made in CAAMP’s fall 2012 report) is that the housing market (on an aggregated basis for Canada, which I realize hides a lot of local differences) was already in a balanced/soft landing state well before the announcement last June – at the time, the market was organically cooling based on the economic conditions of moderate job growth and reasonably stable interest rates. Since cooling was already happening, which should have been evident to the Minister’s advisors at the time, the 4th round was unnecessary and in fact dangerous.
I’m checking out of this discussion now.
I really enjoy these exchanges which are honest and sometimes passionate and usually vastly more polite than in most other forums.
I’m guessing that in about a month from now we are going to have another REALLY interesting discussion.
Ciao,
Will
One more thing. I did a presentation on this today (Toronto-centric, but with a dollop of Canadian content). You can find the slides at my personal website – wdunning.com.
Right, because when a person thinks of who the go to person is for budget, financial, retirement and investment planning, a Mortgage Broker tops everyone’s list!
The answer is simple. Consumers want government protection of deposits (CDIC) and better rates and mortgage options (CMHC). The cost for these government guarantees is low, and in the case of CMHC, tax payers actually profit from the crown corporation’s success, to the tune of $17 billion over the last decade.
Resources, health care, and Tim Hortons? You’re overlooking the jobs I’m creating that are bringing money into the country with no need to send physical goods in return :)
What a rude and unnecessary comment Banker.
It’s all fun n’ games to dispense unqualified financial advisement with reckless abandon until one day when a client loses their life’s savings because of it.
“Accredited Mortgage Professional” is not a certified financial planner accreditation.
@Snowbird, thank you for taking the time to make your argument. Unfortunately, I disagree with all of your points:
1. Yes, I insist again that mortgage brokers and bankers help promote fraud, sometimes brazenly, sometimes subtly. Many brokers help unqualified buyers skirt the rules. Not every broker or agent is involved, of course, but many are involved, especially during a bubble. When American citizens earning 30K per annum were getting 700K Mortgages, do you seriously believe that the bankers and brokers who were arranging these loans had no idea what they were doing? Or do you seriously believe that human nature in Canada is different or holier than human nature in the US and elsewhere? If you have not seen fraud in the mortgage broking business in Canada, you are either naive, or an insider. Or you are someone who has not paid sufficient attention.
2. You claim that “10 million households” are speaking out against “execssive rule changes”. But where are these 10 million households? 99% of statistics are fabricated on the spot, out of thin air, and your “10 million” hyperbole is a perfect example.
3. YOu claim that no one in the real estate industry wants a bubble. But of course! Why on earth would you want bubble? A real-estate bubble would take away your livelihood. That’s why we are asking those in the industry to check their greed -before what happened to their US counterparts happens to them. You should be thanking the Government from saving you from yourselves.
4. You claim that imposing more prudent requirements on the Canadian housing market “courts economic disaster”. But disaster for who? Is it for Canadians, or for members of your profession?
Sir, most of these rules that the Feds are now tossing aside are merely a few years old. All were introduced by the Harper Government. And before this Government recklessly loosened the mortgage tap, the Canadian Economic was doing just fine. So your claim is just another myth stated as dogma. Let’s not spread fear and uncertainty.
5. Without the rules, prices will continue to rise – until households are swallowed by debt. Seat back and watch what happens when and if the BOC decides to jack up rates!!!
6. Yes, the housing market will definitely crash if household debt keeps rising. Thanks to mortgages especially, Household debt is at an alarming level – or have you not been paying attention? Even the Bank of Canada is threatening to raise rates -primarily as a tool for curbing ridiculously sized mortgages. Those of you in the industry -do you know something that the BOC and the MOF does not know?
7 You claim that ‘people pay the same percentage of their income to put a roof over their head today as they did 30 years ago’. Please offer some proof … your merely laying down another dogma is not enough.
8 I agree that Down payment alone does not determine the quality or prudence of a first-time home buyer, but as far as indicators go, it is a pretty good one. The requirement for some kind of minimal downpayment is a pretty good one. Anybody who has problem with it is merely focused on their commision. If a first-time buy is incapable of saving a mere 5%, maybe they shouldn’t be a house to begin with. People buying with no money down are a risk for the rest of the house-buying population.
9 You claim that the new rules makes life harder for property investors. But actually, exorbitant housing prices are the #1 factor that drives property investors away. I mean, which investor wants to buy a 3-bedroom house at 800K? For how much would they have to rent that house, to meet the running costs? Investors thrive when houses are cheap enough to carry themselves. High housing prices are bad news for both investors and renters. They drive up the costs for renters, and they make the business unprofitable for investors. So anything, such as the new rules, that drives down prices, is a good thing for serious investors.
Despite the tightened mortgage rule changes, it has always amazed me how many mortgage shoppers that are declined by their Bank because they don’t meet the Bank’s standardized lending criteria, go on to fully qualify for a conventional mortgage with a independent broker?
Are there any studies that show what percentage of a brokers new business is previous bank declines?
Banker,
Providing knowledgeable guidance on debt management is a routine activity of professional mortgage planners. This know-how is essential for advice on refinancing, down payments, financing leveraged investment strategies (under the guidance of an investment professional), optimizing and building credit, and so on. I don’t think Marisa was suggesting that brokers should be contacted for specific investment advice. CFPs and other licensed/accredited investment advisors are clearly more appropriate for that.
On a side note, “professional mortgage planner” is a general term that reflects a more holistic approach to financing advice. It is not a designation, nor is it a label that applies to all mortgage brokers.
Thank you Mr. Dunning for your unique research. We refer to it often in our investment analysis.
Slow the market is one thing. Cripple the economy is another.
Let’s be clear. It is not the “government” that is making these changes. It’s the actions of a few in our government. No one voted for these mortgage regulations. They were hastily concocted by our knee-jerk Finance Minister and his regulator drones.
All of them will soon learn the danger of playing politics with a $3 trillion real estate market.
>> Slow the market is one thing. Cripple the economy is another.
Let’s not overreact. So far they have only slowed the market, as intended.
>>. It is not the “government” that is making these changes.
Actually it is. The government was elected and Flaherty acted as an agent of that government. The fact that you expect to vote on individual issues suggests you don’t understand how democracy works
>> All of them will soon learn the danger of playing politics with a $3 trillion real estate market.
We actually have a long and colorful history of playing politics with the real estate market. Flaherty is certainly not the first.
http://saskatoonhousingbubble.blogspot.ca/2013/04/a-look-at-down-payments-amortization.html
Thanks Will for dropping in. Very much appreciated.
I understand quite well how parliament works, thank you.
You say, “Flaherty acted as an agent of that government.”
Agents must act in the principal’s best interest. Flaherty has foisted a destructive economic policy on the market with no accountability. I do not deem him an “agent” in the least.
Perhaps that the common sale. But the real beneficiary is bank access to cheap capital that no consumer would part with at such low rates without the guarantee of government. Plenty of investments and the bulk of household capital is invested without government guarantees, at rates of return appropriate to the risk. So the real beneficiary is not necessarily consumers who earn lowb rates proportionate to low risk bit banks, regardless of their pedigree, who get access to capital at artificially low rates….to reinvest in mortgages, that are also insured by the same government, that also carry no risk to the bank. Quite an advantage. And I guess this is money supply and multipliers in action…..but I won’t pretend its for the greater good of savers.
low rates for savers so borrowers can borrow even more cheaply and drive our current debt levels, and asset prices simply won’t help savers in the long run. Its called gaming the yield curve…its a special business reserved solely for banks and governments… Quite an advantage.
Bankers maybe…. But this is barking at the moon….it is the system.
I love the argument that over 190,000 jobs will be lost – it cracks me up every time! I think this report from Dunning may have had the impact he was hoping for had he released it in September of last year. Unfortunately, ever since the end of last year/beginning of this, everyone has been agreeing that housing will most likely remain stagnant or even decline for this year, and probably some of next. I’m very happy that he gets to go on a power trip with this database that only he has, but I hate to tell him, all he really had to do was listen to what most experts and analysts have been saying for months.
Top banker in am ivory tower: You have only ONE bank’s products top offer and are restricted by that one banks policies and guidelines.
I have almost 40 banks to choose from and hundreds of mortgage products. No contest!
Even before I got into the mortgage business, I would use a broker, for the same reason I use a truly independent insurance broker. With 40 lenders to choose from, and many on the ‘A’ side, what are the chances YOUR bank (TD maybe?) is the best one for me?
I fall somewhere between Banker and Rob on this. While every mortgage broker needs to understand household budgets, for the sake of debt servicing and all mortgage brokers should grasp the basic tax consequences of rental property investment and what constitutes a taxable property flip, really, 90% of us are not trained nor properly licensed to give advice on most financial matters. I have always felt that we should leave financial planning to licensed financial planners
“Experts and analysts.” Haha. Good one Bryan.
By the way, last time I checked, a declining housing market was bad for employment. The question is whether we’ll lose a small or large amount of jobs. 190k could be high or low. None of us know.
I agree that the government is not interested in reversing course at the moment. But if employment, GDP and home prices go down the tubes, it may have a change of heart.
“Providing knowledgeable guidance on debt management is a routine activity of professional mortgage planners”.
Rob, I agree and why is that? What qualifies a professional mortgage planner to dispense any debt management guidance or as Marisa pointed out, personal budgeting advice?
I am all for mortgage professionals further educating the client. I just don’t think personal and household budgeting should be one of them or selling mortgages qualifies them.
Hi Banker,
Mortgage professionals refinance people for a living. It’s their job to know the math and considerations behind debt restructuring. Some are better at it than others, and you can say that same thing for CFPs, insurance advisors, and every other advice-based profession. One’s proficiency in providing refinance and basic cash flow advice does not rest on a designation. It comes largely from on-the-job training, experience, personal research and dedication.
What qualifies a financial advisor to tell you that 30% of your portfolio should be in bonds? What if it’s really 20%? Or 40%? So many investment advisors give bad or biased advice. Counselling people on financial matters is not a science. A degree doesn’t replace experience, knowledge and integrity. Like Rob alludes, letters after a person’s name don’t guarantee know-how and honesty.
I think we all agree that once we create unsustainable jobs by juicing the housing market over the last decade, then those jobs should be maintained and defended to the death.
Bank guidelines? All F.I.’s are restricted by Federal/Provincial legislation and respective regulators. Even the almost 40 banks you claim to deal with!
Is there anyone that still buys the tired and overstated “I shop your mortgage to 40 different banks” hook?
“so many investment advisors give bad or biased advice”
“a degree doesn’t replace integrity”
“letters after a person’s name doesn’t guarantee honesty”
Pretty broad strokes you are painting with there!
What amazingly creative sarcasm.
Now tell us how you’re going to replace those jobs and why politicians have gambled with so many jobs at one time.
They’re just as broad as yours.
Implying that brokers give out “unqualified financial advisement with reckless abandon” is almost too ridiculous to respond to. As I said, you could paint some financial advisors with that same brush. Note that I qualify my statement with the word “some”, which is more than I can say for your exaggerated comments.
I Agree Marisa
Sure, but first let me clarify the question…
I presume you are asking about the reckless RE jobs “gamble” 2006-12 that derived from the juiced market?
Because the ending of a “gamble” isn’t a gamble. It’s simply reality.
It’s not always overstated. Some brokers actually do shop 40 or more lenders.
You can’t get a degree in personal budgeting advice. Most of it is common sense or leaned through experience. Some people dedicate their whole lives to helping people manage debt and they’re very good at it despite having no formal credentials. Given your name and comments, you’d probably love to see people go to a bank for all their financial advice. If that is your agenda fine. At least be honest about it. Claiming brokers can’t provide good debt advice is a weak and ridiculous attack.