Sun
A house is more than a home. It is a store of wealth, an accumulator of equity, an asset that can be leveraged and a legacy that can be left to the next generation.
A 2003 study by Peter Nares and Jennifer Robson-Haddow of the charitable institution Social and Enterprise Development Innovations found that not only do homeowners have higher levels of civic engagement than renters but enjoy better marital stability, family health and well-being among dependent children. Other studies show homeowners are better off than renters in retirement. Then there’s the pride of ownership that cannot be expressed in dollars and cents.
For all these reasons, governments have come to see home ownership as a laudable societal goal and have put certain policies in place to promote it.
To make home ownership more accessible to those lacking the requirements for the traditional mortgage — namely, a down payment of 25 per cent and an amortization term of no more than 25 years — new financial products have been introduced that have dramatically changed Canada’s housing market.
Remember the TV ads by a pitchman selling a guide to buying real estate with no money down? Well, a couple of years ago, Canada Housing and Mortgage Corp., a federal government agency, was released from restrictions that chained it to the conventional mortgage. Now, with a product called CMHC Flex 100, it can finance 100 per cent of a home’s value. Potential purchasers need only show a track record of managing debt and the financial capacity to cover the carrying costs to qualify for a loan. CMHC, which used to be constrained by price ceilings, was also freed in 2003 from any limits on purchase prices.
Perhaps the most popular innovation in the housing market is the 40-year mortgage, introduced in 2006. It didn’t take long to catch on. Three-quarters of all monthly insured-mortgage applications now are for extended terms, with the 40-year product accounting for half of that, according to a report this week by Scotiabank.
Not only has the pool of potential buyers grown but, by spreading payments over a longer period, a buyer can bid on a more expensive property than he or she could otherwise afford. However, this scenario is not without risk. Assume a home purchase of $450,000 with no money down and a 40-year amortization. A CMHC premium of 3.75 per cent of the face value of the loan adds $16,650 to the cost. At current interest rates, it would take a decade to pay off the insurance premium alone and more than 30 years before the amount paid in interest dropped below the amount applied to principal.
Bank of Canada governor Mark Carney told the House of Commons finance committee last week that he’s concerned about the prevalence of high loan-to-value mortgage products. “They add momentum in the housing market and, if everyone has a 40-year amortization mortgage, then you just have higher housing prices,” he said.
Scotiabank warned that “future shock risk is being intensified” in the event that 40-year mortgages become the norm and highly-leveraged buyers suddenly face an unfavourable turn in interest rates or wage growth. “That’s uncharted waters for the Canadian mortgage industry,” said Derek Holt, vice-president of economics for Scotia Capital, Scotiabank’s investment banking arm.
Despite the liberalization of Canada‘s mortgage market, lending practices still are conservative compared with the free-for-all in the United States that led to the subprime mortgage debacle. Although Canada is not as vulnerable to a housing crisis as the U.S. was, there are signs the market is cooling and buyers should be cautious. If the economy softens, as expected, it will be an inauspicious time to be over-extended.
The central bank, CMHC and mortgage lenders, particularly the chartered banks, along with government, should keep a sharp eye on the housing market and apply their best efforts to ensuring home ownership continues to be the best way for most Canadians to attain financial security.
