Developers and financiers fear an even deeper slump in B.C.’s housing market from the federal government’s latest moves to eliminate 30-year mortgages in Canada.
To date, sales of B.C. residential real estate have remained well below 2011 levels. According to sales data from the BC Real Estate Association, the number of units sold in the province in 2012’s first five months is 7.9% below sales in the same period in 2011. The average MLS price has also fallen 8.3% to $540,270, and sales have dipped 15.5% to $17 billion. While housing starts have remained strong, uncertainty over the housing market’s medium-term prospects remains because the changes could lead to significant economic declines.
M.J. Whitemarsh, CEO of the Canadian Home Builders’ Association of BC, warned that a housing construction slowdown could reduce:
•the 130,000 direct and indirect jobs the industry provides;
•the $15 billion impact in B.C.’s economy; and
•the $60,000 in spinoff spending the renovation and home-building sector generates.
While many have lauded the longer-term benefits of mortgage market tightening in Canada, some are questioning whether the change took into account the unique circumstances of the Metro Vancouver market, which, because of its limited geography and growing population, has Canada’s least affordable housing.
The latest mortgage changes are likely to affect between 10% and 15% of first-time home buyers in B.C. based on information from the Canada Mortgage and Housing Corp. With roughly a quarter of total home sales done by first-time home buyers, based on BCREA annual sales data and information provided by the Ministry of Finance, the move likely affects about 2,300 buyers in B.C.
Jeff Fisher, the Urban Development Institute’s deputy executive director, said concerns of an overheated market in Vancouver are “overly dramatic.”
“The amortization rate is a blunt instrument. In our view, the market is self-correcting at the moment anyway, and we’d prefer it was left to the market instead of government intervention.”
If the federal government was really interested in addressing household debt levels, Whitemarsh said it should have looked first to regulate other personal credit products like credit cards and personal loans.
According to Canadian Bankers Association data, the proportion of mortgages in Canada where lenders have missed three or more payments was 0.35% in April. That compares with the 1.04% of all credit card holders in Canada who have not made a payment in more than 90 days.
Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP) suggested Ottawa was more concerned with limiting its own mortgage loan liability through CMHC-backed mortgages than addressing household debt.
Fisher noted that the shrinkage of the first-time home buyer market will likely force developers to re-evaluate future developments, particularly those aimed at singles, young couples and other first-time buyers. But he hasn’t heard of anyone saying the changes would affect the viability of existing projects.
Market fundamentals like job growth and in-migration remain stable in B.C.
Ian Samson, vice-president of commercial real estate lending at Coast Capital Savings, said that, given the changes, lenders would likely be flexible with developers and extend the time to collect the necessary number of pre-sold units to secure construction financing. This would apply primarily to projects with lower priced units or those that cater to first-time home buyers.
With the elimination of 30-year mortgages for “high-ratio” home buyers who provide less than 20% of the purchase price as a down payment, industry experts remain uncertain about the future of conventional 30-year mortgages.
When the government reduced the amortization periods over the past two years from 40 years to 30 years, most banks and credit unions stopped offering those mortgages once the new regulations went into force.
While the end of conventional 30-year mortgages would further erode affordability for first-time home buyers, renters would likely face higher costs as landlords who buy units to rent face higher financing costs from a shorter amortization period.
A report by Central 1 Credit Union chief economist Helmut Pastrick suggested that rental demand would remain high in Metro Vancouver, which would increase demand for investor-owned rental units. For now, banks and credit unions still provide conventional 30-year mortgages, but it remains to be seen for how long. •
