New Mortgage Rules Will Negatively Affect Housing Market: Report

There could be an 8% decline in housing market activity due to new mortgage rules, according to a report from Mortgage Professionals Canada (MPC).

In the Annual State of the Residential Mortgage Market in Canada report, MPC chief economist Will Dunning predicts it will take a number of months before there’s enough evidence to assess the effect of the new rules.

The biggest rule change is that high-ratio insured homebuyers must qualify for mortgage insurance using the Bank of Canada’s posted rate (currently 4.64%) for five-year fixed-rate mortgages. He predicts this change will result in fewer homebuyers at the entry level and some people who already own homes and want to sell won’t be able to get the price they want. Dunning also expects housing starts will decline.

As a result, there will be fewer jobs, which will further reduce housing demand and house price growth. Job creation will slow and housing prices could fall in some communities.

There’s a concern that in attempting to address risk in the housing and mortgage markets, the new rule change—the sixth change since 2008—might be too much, Dunning says. “This particular policy may be creating a risk to the broader economy that is greater than the risk it is trying to prevent.”

The report also includes an overview of the state of the mortgage market. Here are some highlights:

Mortgage choices

For mortgages on homes purchased between 2014 and 2016, 84% have contracted amortization periods of 25 years or less while 16% have extended amortization periods. The average contracted amortization period is 22.4 years. Canadians also want to pay off their mortgages as soon as possible. On average, the most recent buyers expect to repay their mortgages in 18.8 years.

Among homeowners, 8% rent out part of their home. This isn’t limited to first-time homebuyers or recent buyers. It’s widespread among different groups of homeowners with mortgages. For 42% of them, it’s due to economic necessity.

For borrowers who took out a new mortgage in 2016, 47% used a Canadian bank and 43% used a mortgage broker. Alternative sources include credit unions (5%), life insurance and trust companies (2%), and other (4%).

Mortgage rates

The average homeowner mortgage rate is 3.02%, down from 3.07% last year. The average rate is 2.76% for mortgages on homes purchased this year and 2.7% for mortgages renewed this year. (You can also search Ratehub.ca for the best mortgage rates.)

Sixty-four percent of borrowers who renewed their mortgage in 2016 saw their rate decline. Among all borrowers who renewed this year, their rates fell by 0.4 percentage points.

Down payments

The rapid increase in home prices means required down payments have increased relative to incomes. As an example, a 20% down payment on the average priced home is equivalent to 102 weeks at the average wage in Canada. This number has doubled compared to 15 years ago.

The biggest source of money for a down payment comes from personal savings (51% for those who purchased their home during 2014 to 2016). The share for personal savings has been roughly stable since 1990. Another source of money for down payments are gifts or loans from parents. This has risen to 18% for recent buyers (2014 to 2016), up from the average of 14% for all first-time buyers. Loans from financial institutions are a larger source (26%), which has remained stable. Additional sources are withdrawals from RRSPs (8%) and other (4%).