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Factoring new mortgage rules into the market

Rita Trichur, Steve Ladurantaye
Globe and Mail
Saturday, January 22, 2011

Throwing a bucket of cold water on an already-cooling housing sector is not a step any government takes lightly.

This week, Finance Minister Jim Flaherty did just that. As of March 18, the government will no longer insure mortgages with amortization periods of more than 30 years. That will keep some potential home buyers out of the market, and in theory, help stop already debt-burdened households from going even deeper. Ottawa will also make home refinancing rules tighter, among other moves.

The consumer debt habit is widely viewed as a risk to the economy, and the move to curb its growth seen as necessary. But when it comes to the housing market, Ottawa has waded into muddy waters.

While the effective elimination of the 35-year mortgage could diminish housing prices, economists say it's not possible to calculate the degree of dampening with any certainty.

That's in part because some homeowners take long mortgages initially and then change the terms later, paying more than required in order to retire the debt sooner.

And there are a host of other factors that determine housing prices such as interest rates, employment growth and housing supply.

“Given the structure of the mortgage market, this is like a surgical strike,” said Benjamin Tal, deputy chief economist at CIBC World Markets. “They are able to aim without too many side effects because of the way the mortgage market is structured in Canada. The impact is insignificant.”

There’s little data examining the issue.

The new rules can be expected to dampen both home sales and prices as potential home buyers face new limits on how much they can borrow, encouraging them to opt for cheaper homes, economists said.

Douglas Porter, deputy chief economist with BMO Nesbitt Burns Inc., said the changes would reduce the amount that people can borrow by up to 7 per cent.

Corresponding price declines, though, are hard to predict. Canada’s housing market has been cooling for months and interest rates are widely predicted to begin rising again during the latter half of this year.

“I suspect that what we’ll end up seeing is home prices about flat this year,” Mr. Porter said.

Bank of Nova Scotia economists Adrienne Warren and Derek Holt suggest the new limits on amortization will add about $100 to the monthly principal and interest payment on an average priced house, compared with a 35-year mortgage.

“Looking further ahead, as interest rates begin to move higher in 2012 and beyond, the cumulative impact from shorter amortization options on housing affordability could be substantial,” their report said.

The Bank of Canada hinted at a link between prices and amortization rates last year, when deputy governor Sheryl Kennedy said “financial innovations” such as longer amortization rates can “encourage speculation in quick flip financial investment.”

That surge in home buying helped drive up prices, particularly in large urban centres. As a result, since 2007, increasing numbers of Canadians have opted for mortgages with amortization periods stretching well past 25 years.

Initially, 40-year mortgages saw the most explosive growth until Mr. Flaherty took action in 2008 to do away with those unconventional loans.

The following year, however, marginal consumers increasingly turned to 35-year mortgages to fill the void, a trend that continued well into 2010.

With files from freelance reporter David Milstead

Posted on Tuesday, January 25, 2011 at 11:05PM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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