The mortgage bomb

Buying where it’s too good to be true

Nothing is of greater financial consequence to most citizens than residential real estate. So when, without consultation, notice, hearings or warning, the rules of home financing change in a way that affects the market for everyone, this is big news. After all, why obsess about two hundred bucks a year a carbon tax might mean on the gas to heat your home, when the property itself drops $45,000 in value (as has happened in Edmonton)? Right now I’d say Jim Flaherty is a far greater threat to your family’s money than Stephane Dion ever could be.

This week’s blockbuster changes – good reforms, but at the worst possible moment – guarantee the already-deflating real estate market will be out of air by Christmas in most places. Within 12 months, it’s a safe bet to say everyone’s house will be worth 15% less, and some will be cheaper by a third. Meanwhile, lots of people are about to lose their jobs in sales, construction and finance.

Don’t confuse this with US-style foreclosures or people being forced out on their lawns or sheriffs’ notices on windows. Rather it’s a 1993-style meltdown in housing values that will drop the net worth of the country. If you don’t need to sell for a few years, no problem. But if you were planning to cash out to fund your retirement; or if you’re a young couple with a big mortgage and no equity; or you just need to change houses because of a job switch, a divorce, a downsizing or whatever, well, Ottawa has skewered you.

Don’t get me wrong, I am 100% against 40-year mortgages, and they should never have been allowed to flourish by Jim Flaherty (a stunning 62% of all new home buyers now take them). I rail in my current book against these mortgages, along with zero-down financing, which the government also condones. Together they’ve been our own dirty little subprime secret, which turned a boom market into a bubble and allowed thousands upon thousands of buyers to get into home ownership far beyond their means. They have help float the country on a new sea of debt.

These changes also goosed home prices by lowering the bar for financing, and created an entire industry of no-money-down real estate. So, bad policy. It was a giant mistake to allow such practices. And right now the ending of them will also have giant consequences.

First-time buyers wanting a 40/0 house will have until October 15th to dig in. After that, the available pool of buyers will shrink instantly as more onerous financing requirements click in. So, imagine you are a condo builder, or are marketing a subdivision – you now have 100-odd days to get rid of this inventory before a big chunck of your clients can no longer buy. Guess what that’ll do to asking prices?

Also think about Toronto, Calgary or Vancouver, and then contemplate Ottawa’s new requirement that no more than 45% of a buyer’s income can go to total debt service. After all, in Toronto and Calgary the average debt burden is over 50%, and in Vancouver (average house price $712,000), it’s 73%. Thus, after October 15th, either house prices start to tumble, or sellers will not find buyers with financing.

Think about giant Mattamy Homes, the largest builder in my riding of Halton and, in fact, Canada. Mattamy builds and sells so many homes the company chugs them out on a giant assembly line. But Mattamy also sells houses to people without money, asking for just 1.5% of the price in cash, to cover closing costs.

After October 15th, no mortgage insurance will be given without a minimum downpayment of 5%. That may not sound like a big change, but on a $400,000 house, it means a young couple has to cough up $20,000 instead of $6,000, plus closing costs, for a cash outlay of $26,000, or almost five times more. Also after the big day, self-employed buyers will face a much tougher time finding financing, since banks will no longer be able to insure “liar loans,” which are extended to those unable to prove their ability to repay.

The initial consequence of this could be a flurry of real estate activity as new developments are dumped for quick sale and desperate, cashless couples buy. But come the autumn, natural market forces which have depressed prices and mushroomed listings, will be kicked into overdrive. Already sales volumes have crashed 43% in Vancouver, over 25% in Toronto and prices are tens of thousands of dollars lower in Edmonton and Calgary.

Says the Calgary Real Estate Blog, “Now the pressure will be squarely on the sellers. Those now wanting to get out because of the new changes will have to take a financial loss. Remember, we are still at record inventory levels. To sell in this marketplace would mean to lower expectations and prices dramatically.”

Of course, our real estate bubble needs to be pricked and the asset inflation let out. We’ve put far too many eggs in a single basket. And all booms end badly. But this week’s actions could make an inevitable correction feel like a financial execution.

By the way, between us, just before Parliament adjourned this motion of mine was passed by the Finance Committee: “That the Finance Committee study the state of the Canadian housing market. That the committee, in the course of this investigation, probe the influence of 40-year mortgage amortizations, the growing popularity of no-money-down financing, the Canadian subprime market, CMHC and the regulatory environment surrounding the mortgage and real estate marketing industries.”

I knew there was a problem. Jim Flaherty knew he’d created one. Now in the quiet doldrums of summer, with Parliament silent and unaccountable, the bill has landed.

63 comments ↓

#1 Jon B on 07.11.08 at 12:54 am

“Ottawa’s new requirement that no more than 45% of a buyer’s income can go to total debt service. After all, in Toronto and Calgary the average debt burden is over 50%, and in Vancouver (average house price $712,000), it’s 73%.”

If we don’t see a massive effect from this new 45% regulation in the Vancouver area, it’s proof positive that proceeds of BC Bud and other tolerated crime in this leftist Province has been the high Octane fuel that has propelled our local RE market to record highs.

#2 Mike.slob on 07.11.08 at 12:55 am

“After 15th October, the new rules will likely contribute to the cooling of the housing market.”said TD Bank deputy chief economist Craig Alexander.
What,Again cooling after Millers’ new Tax in Toronto?
Remember, we are still at record inventory levels.
All our booms end badly.
Not going to happen here and this time it is different right?

#3 David on 07.11.08 at 2:57 am

This is why I contend Canada will have the worst real estate bust of the G8 nations. Last to acknowledge a housing bubble and last to change mortgage financing rules. Energy prices and interest rates are heading north and home prices are heading south. This is the worst of all possible storms at the worst time. Nice Canadians will show the rest of the world how to do an asset bubble bust properly.

#4 Brian on 07.11.08 at 3:03 am

What would you have had them do? It sounds like you would have wanted them to have waited for the bubble to deflate naturally before forbidding liar loans and 70% debt ratios?

I think this had to hurt no matter when they did it. 2006 would have been perfect, 2007 would have been okay, and 2008 is late. But it’s not like we would have been *better off* if they’d waited until 2009 or later.

#5 Ald, GTA on 07.11.08 at 3:09 am

Middle class about to be skinned alive…

First, a 0/40 bait, and now sharp treble hooks yanking you out of mortgage ocean… Someones been fishing ;)

In the “end”, whose accountable and who will feel the axe? Who pays for all this $hit ???

Ald, GTA

#6 Mike.slob on 07.11.08 at 4:05 am

Open the link bellow:
http://www.canada.com/ottawacitizen/news/story.html?id=34abe78e-d256-4f2e-b053-67a3d9ebfa1a

#7 Islander on 07.11.08 at 4:31 am

It’s Jim Flaherty’s fault that buyers with no business buying houses did so? Flaherty put a gun to people’s heads, did he?
Well guess what? 0/40 mortgages affect me exactly not at all, since I rent. But Stephane Dion’s NEP II will rip money out of my pocket as sure as the sun rises every morning. So will his pal Gordon Campbell’s gas tax thievery.
So don’t blow the credibility you’ve built by spinning the housing meltdown into some sort of Conservative government problem.
The only people who will be blown out of their houses are people who made the CHOICE to buy a house they couldn’t afford.
I can’t CHOOSE to not heat my home. And I can’t CHOOSE TO NOT WORK. So Dion’s and Campbell’s tax grabs get me no matter what.

#8 JB on 07.11.08 at 7:31 am

I would suggest that anything less that a 25% down as a deposit should have never been allowed since it puts the banking system at risk. Why were there no banking failures in the early nineties? Asset values fell, but not large enough for banks asset to be sold back into the market. Negative equity was not the problem for Canadians in the early nineties. That changes the outcomes vastly from 1989-1994 time periods.

#9 John on 07.11.08 at 7:38 am

62% of all new mortgages have 40 year ammortizations? wow.

any idea what percentage are 35 year? 30? how about how many are zero down?

#10 Cheech on 07.11.08 at 7:55 am

I think there are two dirty secret in the real estate game. The first dirty little secret is being addressed by the tightening of the rules on 40 year mortgages and zero down is the first.

The second is that the Canadian financial sector is much more conservative than the American. I think Canadians like to look down on our flashier neighbors, but given the same scenario, we would behave the same.

The guy you talk to when you get a mortgage is on commission, just like any sales man. He has some leeway and wiggle room to give you a deal. They will benefit most if they can get you into the biggest fattest mortgage possible.

Same with the real-estate agent: bigger sale, bigger commission.

What are the repercussions of the transaction falling apart to the sales man 5 years from now (or 2 years or 6 months). Nothing. They get there commission probably on a quarterly basis. As growth slows down, they will be trying to milk the existing sales for as much as they are worth, using the wiggle room (40 year amortization, 0% down) to get you .

In the last year, I found a lot of people are getting mortgages (sometimes more than one for speculative reasons) that surprise me. These people are self employed or people that have multiple part time jobs. Is the top of the market the right time for someone with an insecure job to be going heavily into debt? I wouldn’t think so, yet our conservative financial institutions don’t seem to have a problem with this.

Executive are probably ignoring the operational risk of their commission based mortgage set up. Given a commission, a Canadian will behave the same as an American. I tend to find that Finance Executives have no hands on understanding of what the guys that actually do the dirty work do. Usually they fast tracked right through those jobs.

#11 pessimist on 07.11.08 at 8:04 am

i’m glad the 0/40 is gone. the feds shoud have gone further and implemented 20%/25 yr max. people who are barely making their mortgage payments means there isn’t any money put into repairs and maintenance of their homes , leading to run-down, unkempt neighborhoods all over the country.
.
which devalues property values…and no buyers willing to buy in the area…this becomes a vicious cycle

#12 Mark on 07.11.08 at 8:51 am

With “Ottawa’s new requirement that no more than 45% of a buyer’s income can go to total debt service” does this mean that when a homeowner with over 45% going towards total debt service has to renew their mortgage they literally will not be allowed to? What will they do then exactly? Will they be forced to sell as they can not get financing anymore?

#13 patriotz on 07.11.08 at 9:15 am

This is why I contend Canada will have the worst real estate bust of the G8 nations.

No it won’t. In much of Canada you can still buy a house for no more than, or not much more than, the cost of renting. The country as a whole is less overpriced than the US, and much less than the UK.

You will however see a huge bust in BC and of course Alberta is already a year into one, and other places in the West and Toronto will be hit too. But not the coast to coast meltdown you are seeing in the US.

#14 never too late on 07.11.08 at 9:34 am

Thank you for the timely article. A quick question:

Do mortgages insurers in Canada (CHMC & others) insure the top 20% of the value of the mortgages or do they insure 100% of it?

In other words, what is the obligation of Ottawa on a $500,000 mortgage nothing down? $100,000 or $500,000?

Garth it would clarify the question to know that. Thank you in advance.

The entire principal is insured. — Garth

#15 Al on 07.11.08 at 9:47 am

Garth,

While I know you’re a politician, it’s showing up too much in this post. Yes it was a bad idea to allow 40/0, but it’s a good idea to cancel them. As Brian pointed out, when would you do this (that doesn’t require a time machine)?

Look at the wording in this blog:

“First-time buyers wanting a 40/0 house will have until October 15th to dig in. After that, the available pool of buyers will shrink instantly as more onerous financing requirements click in.”…”Guess what that’ll do to asking prices?”
It will lower them, which is what we want to see. This is good, not bad.

“After all, in Toronto and Calgary the average debt burden is over 50%, and in Vancouver (average house price $712,000), it’s 73%. Thus, after October 15th, either house prices start to tumble, or sellers will not find buyers with financing.”
This is all a good thing. Prices will come in line with incomes. People will be able to afford what they buy. Yay again.

It’s like you took lines out of the CREA handbook in order to attack the Conservatives. Go after them for creating the 40/0 for sure. Give ’em a good kick for not doing something like this sooner. But this post…..

These ‘innovations’ should never have bene allowed, and the minister of finance was wrong to push them through in order to satisfy a mortgage industry desperate for ways to qualify buyers who were being priced out of the market. That deepened our problem and will esacerbate the correction for everyone. He needs to be identified, lest we have politicians who do the same again soon. This is a responsible comment. — Garth

#16 Joanne on 07.11.08 at 10:16 am

It’s a no brainer, that anyone taking on servicing a high debt ratio won’t be able to save for retirement, children’s education or life’s unpredictable hiccups. Your friendly banker or Realestate agent doesn’t give much thought to “The Greater Fool ” either. Good luck out there , this isn’t going to be pretty.

#17 Simon on 07.11.08 at 10:34 am

Hi Garth,

I have been following your blog for some time now, and it has re-inforced everything I have been thinking.

I will soon be able to put 25% on a home with my goal to keep my monthly payments at approximately what I am paying for rent which is $1,200 a month.

While I live in the suburbs, I am not looking at a castle but just a nice home in an established neighborhood.

I am prepared to sit and watch this fall out happen and pick up a home in the next year or two … but my question is:

(not that you have a crystal ball, but you did significant research into real estate to write your book)

How long will a first time home buyer need to wait before getting a great deal?

My brother lost his place in the last 1990’s recession. Does the Andex chart show how long it took to dig out? I think it was approximately 3 years.

Cheers.

#18 zed on 07.11.08 at 11:06 am

C’mon people… Let’s consider the big picture

This is the traditional cycle of boom / bust that has been going on since the days we gave away our gold to the goldsmiths and they issued us promissary notes in return:

Loose credit / easy lending period followed by a period of tightened credit… a certain percentage of people get squeezed out everytime and the big bankers profit.

So lost in the fine print, y’all can’t see the forest for the trees.

Bank of Canada: private corporation
Provinces: corporated entities
you: corporation (artificial person)
unless you really know who you are
but then if you did, you probably wouldn’t be too worried bout all of this

Cheers

#19 Its Coming!! on 07.11.08 at 11:14 am

http://network.nationalpost.com/np/blogs/fpposted/archive/2008/07/10/housing-problem-creeping-up-on-canada.aspx
check this one out too!!!!

#20 smwhite on 07.11.08 at 11:21 am

Simon, here is a chart for the history of RE in Ottawa, now Ottawa is a very conservative market compared to the current situation in the West Coast and Southern Ontario.

http://www.homesinottawa.com/index.cfm?fuseaction=reports.trends

Remember if you bought in and around the height of the last market say 89 – 90, it took until 02 – 03 for things to even out. I see a similar situation in Ottawa, maybe worse because of the speculation and Garth’s pet 40ym…

Garth, nice to see that this moves comes AFTER parliament concluded for the summer, I hope you promise to make a big fuss this fall!

#21 dotava on 07.11.08 at 11:38 am

#8 JB on 07.11.08 at 7:31 am

“I would suggest that anything less that a 25% down as a deposit should have never been allowed …”

Agree with you but family with over 100K income (as mine) can’t save 25% of ridicules prices for “cardboard boxes”.

#22 Mountain Girl on 07.11.08 at 11:40 am

I was inclined to agree with Al’s comment that this particular post from Garth felt way too much like Conservative-bashing. But Garth’s response does strike a chord with me: I want accountability for the decision to let 0/40s happen in the first place. So, Garth, go after Flaherty, but please don’t forget all the bankers and mortgage brokers and even the mainstream media, on the way. I think people are ready to hear this message (hey, the book sales and the library waiting lists for the book suggest it’s intriguing people, at least).
We can’t turn the clock back and give financial counselling to everyone who took out a foolish mortgage, but we can get some good out of the situation: use it to get consumers to wake up and start using some critical faculty before making big decisions.
I can’t believe I’m saying this, but Islander – I do agree with you :) – nobody held a gun to anyone’s head in this bubble. There were some bad policies in place, but no one should get let off the hook on this one. Make a big stink that hopefully results in better lending practices, more transparency in the real estate market, and maybe (I know this is very optimistic) a greater understanding of sound financial decision-making by Joe Public.
I don’t particularly want to see Mr. Flaherty painting himself out to be Mr. Responsible in this situation, when he had a hand in causing it. I don’t care what party he comes from. Accountability, please.

#23 Westcoaster on 07.11.08 at 11:49 am

Back when we bought our first home our financier informed us that we would need to put 25% down and that our mortgage payments should not exceed 35% of our gross income. People have been lured into a fool’s paradise of a 0/40 formula with interest rates as low as they have been for decades. What happens (on top of everything else Garth has articulated) when interest rates go up?
Does Garth have an opinion on what the interest rate pattern might be in the next couple of years? NB we sold our house in the 80’s a year after buying it and put the money in CSB at 18!!!!% and went travelling. We are currently in a cash only position again and are renting.

#24 dotava on 07.11.08 at 11:53 am

#11 pessimist on 07.11.08 at 8:04 am
“i’m glad the 0/40 is gone. the feds should have gone further and implemented 20%/25 yr max …”
That is right approach – but what to do now – increase the wages to reach the level that 30% of median income can cover the mortgage (will generate hyper inflation) or decrease prices (what leading to deflation). Looks like loosing/losing combination.

#25 Ouch on 07.11.08 at 12:06 pm

Hey Garth,

I’m feeling pretty good. Sold my home 1 year ago for big bucks. Renting a brand new condo for $1,000.00/month COMPLETE in Oak Park in Oakville. I was just on MLs.ca and there are are currently 25 units listed for sale and only half the building has closed. I will be picking up a unit a year from now for $0.30 on the dollar. GOD I LOVE THIS COUNTRY!!!

#26 dotava on 07.11.08 at 12:11 pm

“These ‘innovations’ should never have been allowed, and the minister of finance was wrong to push them through in order to satisfy a mortgage industry desperate for ways to qualify buyers who were being priced out of the market…”

Garth

That’s exactly what happened when you choose the guy who screws provincial finance to become Canadian Finance Minister. Shouldn’t be important which party CFM belongs to – most important that we have best MAN for the job.

#27 Mike.slob on 07.11.08 at 12:27 pm

From Statistics Canada ,July 11/08:
In June, employment declined by 24,000 in Ontario, pushing the unemployment rate up 0.3 percentage points to 6.7%.
The unemployment rate in Canada edged up 0.1 percentage points to 6.2%.

http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm

#28 Fliprbaby on 07.11.08 at 12:31 pm

This is awesome. Everyone will panic and sell low so that us flippers can pick up cheap homes and resell them in the great housing rebound of 2009. You heard it hear first.

The Great Housing Rebound of 2009 – can’t wait!

#29 BearClaw on 07.11.08 at 12:45 pm

The timing is not ideal but this is a good move. At least it was done voluntarily instead of being forced sometime in the next year. It will prevent first time buyers from using these risky mortgages during the short term while the housing market is in a wile e coyote moment and strengthen the market long term.

It would be interesting to compare the allowed by the US equivalent Freddie and Fannie south of the border to the CMHC. They are melting down something fierce.

#30 keesio on 07.11.08 at 1:50 pm

Question to Garth and others,
I read on this forum that I should wait at least another year or two for prices to bottom out. However, with the new rules to eliminate the 40/0 mortgage on October 15th, do you think prices will bottom out sooner (end of the year).

Thanks

No. — Garth

#31 JB-ott on 07.11.08 at 1:53 pm

Fliprbaby,

With the announcement, there is a good chance that prices aren’t going to start declining until mid-October.

I don’t think many people share your view that a rebound is going to take place in 2009 – quite the opposite.

#32 My_View on 07.11.08 at 2:04 pm

The Great Housing Rebound of 2009, LMAO. However long the boom is, the bust lasts just as long.

#33 patriotz on 07.11.08 at 2:15 pm

“Agree with you but family with over 100K income (as mine) can’t save 25% of ridicules prices for “cardboard boxes”

Well if 25% down payments were required prices would have to come down then.

Right?

#34 Farley Mohawk on 07.11.08 at 2:52 pm

It’s all looks like politics to me.

The housing market was starting to droop 2 years ago, when the 0/40 mortgages were introduced. That held off the crash for a couple of years, which is probably all Flaherty hoped for. Nobody expected to go this long without an election.

Pulling the 0/40 mortgages now, with a 3 month grace period, will create a sales spike, but it’s another 6 months of cover at best.

I guess we can look forward to an election call by Christmas, then.

#35 3rdman on 07.11.08 at 3:13 pm

Sorry I can’t draw a cartoon:

Imagine the Titanic as an RE boom cruise

Imagine the iceberg [tip of] as 40/0

Imagine the lifeboats as family savings

Get the picture?

#36 Cam on 07.11.08 at 3:17 pm

The first consequence of the new rules will be an increase in inventory. Anyone looking to sell their home (or flip an investment etc.) will now realize that the pool of qualified buyers is about to shrink. In that case, you can hold out as long as you want but if people aren’t able to get a mortgage for your home then even if the demand is there, it won’t matter, your price will have to come down. Add an inflationary environment calling for rising interest rates and there’s never been a better time to SELL.

Interesting times ahead for the west coast.

#37 Rob M on 07.11.08 at 3:26 pm

I’m still on a mortgage broker’s mailing list from back in the day. Here’s how the damage control release and how they’re exploiting it — enjoy:

“Dear Rob,

The Government of Canada announced changes to the government guaranteed mortgages guidelines yesterday that will impact future high ratio mortgages. These changes apply to owner occupied and investment properties.

Please note that this will affect all mortgage insurers (CMHC, Genworth, AIG) as government guaranteed mortgages apply to all private and public mortgage insurance company products. <<>

We will keep you posted on an future developments. Please call us if you have any questions or require further clarification on this matter.

Please see the government announcement below:

The Government of Canada today announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian housing market. The new measures include:

Fixing the maximum amortization period for new government-backed mortgages to 35 years;

· Requiring a minimum down payment of five per cent for new government-backed mortgages;

· Establishing a consistent minimum credit score requirement; and

· Introducing new loan documentation standards.

Today’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.

The new limits are planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Certain exceptions would also be permitted after October 15. The Government will work closely with all stakeholders to ensure timely and effective implementation of these measures.

As these measures relate only to new, government-backed insured mortgages, Canadians who already hold mortgages will not be affected by this announcement.

The measures announced today will build on the strength of Canada’s housing market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.

Mortgage arrears—overdue mortgage payments—have also remained low. In recent years, the percentage of mortgages in arrears for three months or more continues to be at low levels not seen since 1990.

Sincerely,
XXXXXXXX
Senior Vice President, Mortgage Planner”

#38 Rob M on 07.11.08 at 3:27 pm

oops… here is the salient piece of copy in that release… where the parentheses were:

“…This announcement does not preclude private mortgage insurance providers from offering 100% financing and 40 year Amortization, however, if they choose to offer mortgage insurance for products outside of the government guaranteed mortgage guidelines, they will require lender approval. Without the government guaranteed mortgage, lenders will have greater exposure and will likely build in a premium to offset that risk. We will have more information on this for you in the future…”

#39 Rob M on 07.11.08 at 3:37 pm

#34 Farley Mohawk – my most cynical political instincts say you’re bang on here.

Garth? do tell? :>

#40 Rob in Madrid on 07.11.08 at 3:42 pm

it’s not just the US that is having problems….

UK in deep DooDoo

#41 Future Expatriate on 07.11.08 at 4:14 pm

Fliprbaby, nice strategy; won’t work, people who come here are too smart for your ploys.

You go right ahead and buy in 2009, and be prepared to hold onto your “flipper” for 15+ years until the market gets remotely close to a profit for you.

Flippers are not an endangered species; they’re EXTINCT.

#42 smwhite on 07.11.08 at 4:17 pm

3rdman,

How about adding Jim Flaherty with an ice pick, chisel or a hair dryer on the bow of the ship getting ready to attempt to take down the big iceberg. :)

Fliprbaby,

You’d better buy now(and buy lots) before housing gets to the point where nobody will ever be able to afford a house. Get ready for that “surge” in prices in 2009! Worst case the taxpayer will bail you and your cockamamie scheme out, right?

#43 WaitingInToronto on 07.11.08 at 5:18 pm

ING pulls out of 40-yr mortgages immediately:

http://www.thestar.com/Business/article/458315

Wonder if/when the other banks follow suit. It will be interesting to see when/if the listings start flooding the market.

#44 David on 07.11.08 at 5:46 pm

Jack Aubry from Finance Department and Mark Carney from the Bank of Canada were talking about preventing the formation of a housing asset bubble and closely monitoring against the potential for predatory sub prime lending practices. These types of comments might have made slightly more sense in 2002. One can not but think some of the folks in Ottawa have been on a desk bound working vacation for a number of years. All of us will wind up paying for the inept decisions of the bureaucratic ball scratchers in Ottawa. The biggest asset bubble in Canadian history and Ottawa starts talking up prevention and strengthening the housing market.
Flip the business pages and RBC is looking at potentially $3 billion in USA mortgage market write downs. RBC can’t use any Enron style accounting tricks in the new mark to market atmosphere.Share prices down 28% in the past year and 14% in the past month. That does not sound like a normal market correction.
The soft landing of 2009 sounds reassuring for the optimists at least and hopefully these folks will continue to lie to themselves for a few months yet.

#45 vanilla on 07.11.08 at 5:47 pm

Garth,

What a load of political crap. The 35-year am and 5% down requirement is a good thing — maybe it’s too late. But’s it’s necessary, and I know you know it. Your rant is what makes people sick of politicians. I would have respected your rant if you’d agreed with the conservative government’s move, and THEN railed against the fact it’s much later than it should have been.

I don’t think you politicians get it: sometimes it’s ok to agree with decisions made by the party in power (or vice-versa). You don’t always have to disagree.

Cut the political BS, and maybe we’d respect you more.

Now get back to real estate and “Greater Fool” and leave the political posturing for your other website.

You see politics. I see public policy affecting the real lives of millions of Canadians. This move by Flaherty is purely political, since it comes at a time when the positive impact will be zero and the negative impact incalcuable. And I’m certainly not going to defend a finance minister who should never have allowed these 40-year ams in the first place, and did so only as a cave to industry pressure. His decision to premit them less than two years, and his decision to end them now after serious damage has been done, must be condemned. If you don’t like it, tough. — Garth

#46 Chincy on 07.11.08 at 5:51 pm

Imagine how p/o the next door neighbour will be when one of the past greater fools decide to sell their $900k home for $850k, make that $775k, nope $720k, help!! $650k…can you say bendover.

#47 nearmilton on 07.11.08 at 6:27 pm

The Canadian Association of Accredited Mortgage Professionals estimates that 37 per cent of all new Canadian mortgages taken from the one-year period ending in the fall of 2007 were longer than the standard 25-year amortization period.

Longer amortization periods can facilitate lower monthly payments but they are widely criticized for burdening homeowners with substantially higher total costs.

Cannot believe it was so high 37%

http://tinyurl.com/6o9kh6

That’s a misleading stat since 40-ams were not available until the end of 2006. The number of new buyers taking these now is just over 60%. — Garth

#48 lgre on 07.11.08 at 6:44 pm

Just watched hot property on cp24, these people from tridel, monster mortgage and Dan the man are hilarious. The women from monster mort decided to tell one person on the phone to quickly buy because the house are really climbing. How foolish can Canadian’s truly get? that is the question.

#49 Anonymous on 07.11.08 at 7:47 pm

When NOBODY is talking about housing or house prices anymore it’s time to buy. When that “rich” uncle stops yaking on and on about how real estate is the best investment out there long term, it’s time to think about buying. When a house becomes just a house, we are getting close.

It will be too painful for homeowners to talk about.

We sold in spring of 08 for a big gain and are currently renting. I have no debt at all. Everything is paid off and I’ve got cash. If I don’t lose all of it in the stock market (just kidding) then we are going to see bargains popping up in the housing market in two years.

We are contracting, so it’s time to pay down debt, try to eliminate your credit cards. Keep your powder dry.

Man, the people who’s house I buy are going to hate me… I’m going to put them though such hell. :-)

#50 EssGee on 07.11.08 at 8:27 pm

That was fast

BMO, CIBC end 40-year mortgages
http://www.thestar.com/Business/article/458918

I like where this is going!

#51 My_view on 07.11.08 at 8:59 pm

I wonder how the whole RE industry is going to spin this, especially the developers. Watch out for the new products going to be advertised. Developer will give you the 5% for the down payment.

#52 My_view on 07.11.08 at 9:17 pm

Garth,

I think interest rates are going up to fight inflation. What do you think?

#53 David_#3 on 07.11.08 at 9:22 pm

garth wrote “You see politics. I see public policy affecting the real lives of millions of Canadians.”

If we really wanted to restore the risk/endebtment balance, we would simply abolish the CMHC. Then a lender would really have to decide if a mortgage applicant is qualified. In fact, the one thing CMHC is really guaranteeing is that the price will be inflated by otherwise unqualifiable applicants (even 35/5 will yield to artificial inflation compared to 25/20)

Basically CMHC is just another interventionist agency skewing the free market. It should simply not exist…

Isn’t it ironic that it led to the exact opposite of its primary mission? ( that is to make home owning affordable…)

Garth wrote “And I’m certainly not going to defend a finance minister who should never have allowed these 40-year ams in the first place”

I totally agree with you on that point!

Now the question is: wouldn’t a liberal finance minister have done the exact same thing? I bet he would have!!

#54 My_view on 07.11.08 at 9:30 pm

Looks like the other shoe is falling off, actually maybe boots.

http://www.reportonbusiness.com/servlet/story/RTGAM.20080711.windymac0711/BNStory/Business/home

#55 hal on 07.11.08 at 9:35 pm

Interest rates are definitely going to go up but the question is by how much? If interest rates go up too high people will lose their homes and the economy will be stressed but if they don’t go up inflation will start to spiral upwards.

#56 patriotz on 07.11.08 at 11:00 pm

“Developer will give you the 5% for the down payment.”

Won’t work. The 5% down payment requirement is on the market value, not the “sale price”. If someone “sells” you a house for 500K and gives you 25K the market value of the house is 475K and the mortgage cannot be more than 95% of that.

#57 David on 07.11.08 at 11:19 pm

Those 0/40 mortgages were nothing more than zero margin call options on escalating house prices. Mass greed and financial institution irresponsibility is a very potent cocktail and Canadians will require a whole generational time frame to barf up the contents from attending the real estate orgy. The 0/40 was merely a symptom of the mal investment in a real estate bubble. Once hundreds of billions of dollars in home equity starts evaporating these financial instruments of mass destruction will be seen for what they were.

#58 nonplused on 07.11.08 at 11:23 pm

I’m with the folks who think bashing the government for making the change now is the wrong thing to do. The error remains allowing the 0/40 in the first place. The sooner it’s ended the better. It’s like trying to find the best time to stop smoking or start exercising or start saving or whatever. It’s always “today”.

I do agree with Garth though that it’s like shutting the barn doors after the horse is well run away. Personally, I don’t think the change is going to make any difference to the ultimate path of the market. It’s going down hard, US style, regardless. Now we just have someone to blame as we go into elections. They could introduce my new “10% back, 50 year amortization” mortgage (the -10/50) at this point and it wouldn’t matter. Even the borrowers are starting to get scared.

I disagree with Garth that the change could affect anyone’s retirement (unless we have decided it’s ok no for people to factor illgotten 2 year gains fostered upon younger “Greater Fools” is an ok way to plan for retirement). People who thought they were rich because thier house went up in price simply don’t get it. We can’t all be rich. If we are all rich, we are really all poor and there is something wrong with the value of the dollar, soon to arrive at a grocery store near you (already hit the gas pump).

Point is the change is reactionary and the market collapse was assured without it. It’s a non-event, other than that you need this kind of press to get the news out to the lumpeninvestorate.

And I also believe it’s not the last revision. 5%/35 is still rediculously lax. It will be 5%/25 or higher (the downpayment part) by the time they are done!

#59 calgary on 07.12.08 at 2:04 am

Canada has a low Mortgage default rate.

Who would walk away from a home if you could sell at a profit? There were plenty of “Greater Fools” waiting to finance that house.
Now (in Calgary at least) home prices are come down, according to my calculations about $35k from July 07 and July 11, 08. With large inventories and the “Fool Pool” getting shallow, who is buying?
What happens to the Mortgage default rate when home prices depreciate?
Even in the US, people who had good credit are defaulting. They had no intentions of walking away, and now home buyers who were prudent with there investment is effected, it’s not just the Sub-prime homes that lost value, they all did.
Hmmm a $600k mortgage on a house worth $450k. hmmm… What to do?
Before the U.S. melt down it was a scar on your pride and dignity to loose your home, not any more, it is a normal occurrence that no-one cares, its part of the “me too” club.
Its a whole new way to keep up with “Jones”.

If I see one more article with comments “Canada’s RE market is not like the U.S., U.K. or Australia” my eyes are going to pop out from shaking my head.

I hope Canada’s invisible shield keeps us from harms way of the Real Estate bust….wait a minute…that’s not a shield…it’s a bubble protecting us.

Remember we didn’t have “Sub-primes” either.

#60 Islander on 07.12.08 at 2:04 am

….I wonder how the whole RE industry is going to spin this, especially the developers. Watch out for the new products going to be advertised. Developer will give you the 5% for the down payment……

You mean, how will the developers continue to entice buyers to purchase their products? Like car companies and their 0% down finance plans? Furniture stores and their Don’t Pay Until 2010?

People who make products need to sell them. What would you like them to do? Not advertise? Not sell? Go out of business to make you happy?

Would you like newspapers to not sell advertising space? Stop publishing? Go out of business?

Take responsibility for how you spend your money. Stop blaming the market for your problems. Stop looking to the government to solve all your problems.

I’m all for skepticism. But if your pitchfork needs a workout, aim it at the central bankers who – under the direction of their political masters – have been printing money at double-digit rates for most of this decade.

THAT is the cause of the bubble. Not hyperbolic marketing. Not realtors. Not 5% down or 0% down. That’s nickels and dimes.

/end rant

#61 Sam on 07.12.08 at 4:02 pm

This bubble has – P-O-P-P-E-D!!!!!! AND I gurantee there
is no turning back for a loooooooong time. YEAH BABY!!

#62 Edumacated on 07.12.08 at 5:47 pm

I don’t think interest rates are going to go up. I see most of the inflation being caused by high oil prices. Raising interest rates isn’t going to make oil much cheaper for us as long as oil continues to set record prices. As more of our income goes towards paying for gas, our demand for other goods and services will decline creating a recession in other sectors (autos, flights, electronics, luxury goods, etc.). We’ve already seen Air Canada layoff 2000 people and witnessed factories declare bakruptcy.
By eliminating the 40-year mortgage, the government has taken the pressure off the BoC for raising rates to “control” the real estate bubble. It’s better to have demand fall by preventing those who can’t afford a home to enter the market than to cause mortgage defaults by raising rates. I think the BoC will hold rates as more evidence surfaces that indicates that we are entering a recession.

#63 Rant on 07.12.08 at 11:16 pm

Islander

The blame game begins…a sure sign of a sinking ship.

Where the pent up frustration comes from, is buyers who were prudent and responsible when home purchasing, were squared off against 0/40 mortgages.
The responsible were handcuffed by wanting a reasonable down payment and amortization, battling against easy leveraged money that caused skyrocketing prices.
No… Profesionals in the real estate business had no hand in perpetuating this.

Bombs away….