Mortgage crackdown threatens economy, report says

Ottawa's moves to crack down on the housing market go too far and are now harming Canada's economy, the group that represents the mortgage industry says.

Economist Will Dunning claims recent rule changes were unnecessary

The vast majority of Canadian homeowners opt for fixed-rate mortgages, a trend that's gotten more pronounced during the current environment of record-low rates. (Stephen Hird/Reuters)

Ottawa's moves to crack down on the housing market go too far and are now harming Canada's economy, the group that represents the mortgage industry says.

The Canadian Association of Accredited Mortgage Professionals represents 12,250 mortgage professionals across the country.

In a report published Monday, CAAMP chief economist Will Dunning says the policy changes announced recently that made it harder for Canadians to obtain insured mortgages were unnecessary, let too much air out of the market, and are starting to eat into the broader economy.

"The opinions being expressed by this author are his own, and are strongly felt," Dunning said. "The changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy."

This past summer, Finance Minister Jim Flaherty announced the fourth major change in as many years to mortgage rules at the CMHC, Canada's national housing agency on whose books the vast majority of Canadian mortgages are held.

The major CMHC rule change was to limit the maximum amortization period to 25 years. That limits how long a homeowner has to pay back the loan, which limits the amount he or she can take out. And that, in effect, limits the amount they have available to spend on a house, keeping a lid on prices.

Realtors note that's already having an impact, with some of the frothier markets showing year-over-year declines in prices. And almost all markets across the country are now seeing a reduced overall number of homes sold.

Dunning estimates that 16.9 per cent of high-ratio mortgages that were approved in 2010 would no longer qualify under the new rules implemented in July. (A high-ratio mortgage is one where the buyer has a down payment of less than 20 per cent and will require CMHC insurance.)

CAAMP data shows that about 55 per cent of of home purchases are funded with high-ratio mortgages. Using Dunning's numbers, if 16.9 per cent of those would-be buyers can no longer qualify, that means total home sales are theoretically being reduced by nine per cent, he suggests.

Data from other agencies backs that up. The latest Canadian Real Estate Association data released last week showed home sales in October were 7.8 per cent lower this year than they were last year.

Dunning says that drag is likely to increase as time goes on. "Reduced activity at entry levels means that move-up activity will also be gradually impacted, because potential move-up buyers will find it more difficult to sell their current homes," he says in his report.

Beyond the value of the homes themselves, Dunning argues that the "housing wealth" effect can't be underestimated. That's the term used to described the impact that higher home prices have on other parts of the economy, as people feel wealthier and more confident about spending and investing in other things.

"The U.S. experience has showed us that what starts as a small drop in housing prices can spiral into a dreadful outcome," Dunning says. "This report is not concluding that the same will happen in Canada, but it is pointing out that the revised mortgage insurance criteria … is unnecessarily raising economic risks in Canada."

The report also shows some interesting new numbers about the mortgage market overall. CAAMP says 79 per cent of Canadians go with a fixed rate mortgage, and about 10 per cent choose to go variable. Historically, about two thirds of Canadians normally lock in, and about a quarter stay variable.

That discrepancy is likely due to the record lows currently being seen in the fixed-rate mortgage market. Indeed, the average Canadian mortgage rate is currently 3.55 per cent, well under the average of 3.94 per cent found a year ago.

There are currently about 9.7 million homeowners in Canada, of whom about 5.95 million have mortgages, CAAMP says. About 3.75 million homeowners are mortgage-free, but CAAMP data shows 2.1 million Canadian homeowners owe some sort of money on a home-equity line of credit, or HELOC.