Tougher mortgage requirements could be on the horizon for Canadian homeowners, according to analysts surveyed by a recent Reuters poll. This comes on the assumption that housing prices will cool off this year. Experts anticipate that housing prices will climb just 0.1% this year, a considerable decrease from the 0.9% year-to-year increase seen in 2011.
Ten out of 14 economists polled by Reuters answered “yes” when asked if they thought Ottawa would step in and tighten mortgage rules within the next 12 months. If Finance Ministry Jim Flaherty were to adjust requirements it would be his fourth intervention in the nation’s real estate market in as many year.
What Kind of Changes Should We Expect?
There are two possible ways that Flaherty could impact the market. Many believe that the first change will involve raising the minimum down payment requirement from the current 5 percent. The other option is to reduce the maximum amortization period from 30 years.
Furthermore, economists feel that this shift, if it were to take place, will happened sooner rather than later. Benoit Durocher, senior economist at Desjardins in Montreal was quoted in the Financial Post as predicting a change occurring “sometime between now and the next budget”. The budget is expected in late March.
But Where are the Signs of Decline?
The main motivation behind a rate change from Flaherty can be traced to the nation’s overheated housing market. Housing markets in both Toronto and Vancouver are, at best, moderately overvalued. But rumours of a Canadian housing crash have been swirling for months without any concrete signs of decline. Canada’s seemingly invincible housing market has managed to soldier on at a staggering pace, but cracks are beginning to form. Economists believe that a rise in mortgage rates or a sharp turn in unemployment could trigger a serious housing decline by the middle of next year (the Bank of Canada has made it clear that rates are likely to remain unchanged until 2013).
What’s more, George Athanassakos, professor of finance at the Richard Ivey School of Business, recently noted that the nation’s residential investment as percent of the gross domestic product is now at 7 percent. Historically, whenever this rate tops 7 percent, it signifies an over-investment in housing, which eventually leads to a severe correction some two to three years later.
Predicting the Future
While it’s impossible to tell how hard the market will be hit if the proverbial bubble pops, economists are confident that we’ll experience a relatively minimal impact. Of the nine forecasters who answered a question concerning how far home prices would fall before stabilizing, the median decline came in around 5 percent. Four of the analysts felt that the market would stabilize sometime in 2014.
Currently, analysts are ranking the Canadian housing market as a seven on a scale of one to 10, with five being fairly valued and 10 being extremely overvalued. But this number doesn’t tell the whole truth. According to Doug Porter, deputy chief at BMO Capital Markets, this valuation is skewed thanks to the Toronto and Vancouver markets. Not surprisingly, the outlook for these red-hot urban areas is far from rosy: analysts predict at least a 3% drop in prices this year, followed by a roughly 4.8% drop in 2013. A slightly lesser drop of 2% is predicted for the Toronto market before the end of next year.
With all signs pointing to a potential market burst, now’s the time to secure a low-rate mortgage and affordable financing. Banks are already beginning to jockey for position, changing rates in order to spur competition, so don’t get caught in the crosshairs. Get pre-approved today to take advantage of available rates.