On Oct. 3, the federal government introduced new rules restricting the way mortgages will be federally insured. It says it wants to put consistent rules in place, particularly to deal with the problem of foreign home purchases in Canada; part of that is to include a “stress test” that would ensure mortagees could still afford to make payments if interest rates rise.
But the move is raising concerns in the home construction industry.
The home builders suggest that the new rules, especially in a soft Atlantic market where pensioners and first-time home buyers are currently the strength in the market, could knock 30 to 40 per cent of buyers out of the picture, because they wouldn’t qualify for mortgage insurance any longer.
It’s understandable that Atlantic homebuilders would be concerned about the effect of a mortgage fitness test; while the test is meant to slow overheated housing markets like Toronto and Vancouver, it’s easy to see the process could very well slow housing purchases in other markets.
On one hand, that’s a bad thing; a depressed housing market means fewer homes being built, less investment in new construction and fewer jobs in the home building sector.
That being said, there are also reasonable arguments for the need for a test to see if those
taking out mortgages can actually afford them. We’ve gotten very used to low interest rates, and household indebtedness has grown steadily across the country.
We haven’t shown any real sign that the majority of Canadians are willing and able to live within their means.
If anything, it’s been the opposite: many families seem prepared to leverage themselves to a tremendous extent, borrowing for homes and cars and vacations and the latest and best appliances. Ask homeowners today how much of their paycheque they put aside for emergencies, and you shouldn’t be surprised if the answer is “nothing.”
You have to ask a simple question: how long can this go on?
It’s close to being the very definition of a housing bubble. And while government action may slow the market, that’s probably a better result than having a larger upwards shift in the interest rate not only upending the housing apple cart, but cutting down all the apple trees and burning them for firewood, too. Just imagine the effect on older members of our society; many pensions have shrunk or disappeared, and homes are often the only major asset seniors end up with. A huge devaluation of that asset is a terrifying prospect indeed.
The best idea is somewhere in the middle — moderate caps on mortgage growth, and a much greater moderation in all of our expectations.
The home builders make a good case: they are an integral part of the economy. But the key should be moderation in all things, particularly in a country where homebuyers are anything but moderate about what they can afford.