For some speculative investors, the upcoming changes will have significant impact as they are required to carry a higher downpayment. In addition homeowners cannot carry higher than about 90% LTV for refinancings and be insured. This does not mean that this part of the market is cut out, only that people borrowing with higher leverage face significantly higher financing costs in the way of non-government-backed loans.
The important change for owner-occupiers comes in the form of changing the requirement that qualification be based on, at minimum, meeting the standards for a 5 year fixed rate mortgage instead of a 3 year fixed rate mortgage. Here is where the confusion starts. First, we are unsure if CMHC requires banks qualify customers at their posted or "discounted" rates. A quick perusal of CMHC's website yielded no definitive answer though perhaps a reader can let me know what they do now. (I will save the rant on CMHC's lack of transparency for another day.) I am assuming, for now, that they use some semblance discounted rates, only because some lenders advertise close to fully discounted rates anyways. The change from 3 to 5 year, I assume, would follow the same general policy. (Update: apparently they will use 5 year posted. See mohican's link in the comments.)
Second, a quick look at posted rates shows 3-5 year spreads as high as 2% and as low as 1%. Taking the spread to be 2%, the amount for which a borrower is maximally qualified drops by just over 20%; at a 1% spread this drops to about 10%. If we assume the entire market is comprised of buyers maxing out what they can afford, we would expect the market to drop by 10-20% on this change alone. The market of course is not solely comprised of people leveraging themselves so as to require mortgage insurance and/or people maximising their affordability limits. While we do know many are taking on high levels of debt to become homeowners there is not much publicly available data to show the finances of those who are buying. You can bet the banks have these data. (Related, banks were the ones openly calling for the government to tighten its mortgage insurance qualification rules.)
Third, an interesting point is that spreads between 3 year and 5 year mortgages are extremely high compared to even 2 years ago when the spread was no more than a few hundred basis points. This is a product of the low end of the yield curve clamped near zero by the Bank of Canada.
When the Bank raises rates, as experts are expecting later this year, we expect the 3-5 year spread to narrow. In other words, while the changes to CMHC policy will have some advanced impact on demand, the longer-term impact in and of the policy change itself will be muted by 3 year rates eventually climbing closer to 5 year rates anyways. There is also no rule that says that 5 year rates cannot fall to the current 3 year rate but I don't have a good feeling for how likely this is.
How will the CMHC changes affect the market? A fringe of able investors will be cut out -- most markedly in the buy-to-let investment arena -- and this has real potential to be a catalyst for what this blog believes is an eventual return to lower price-to-rent and price-to-income ratios. Taking a step back, higher debt levels, rising unemployment, government spending cuts, dwelling under-utilisation, and a reliance on relative (not absolute) pricing by marginal buyers all indicate marginal pricing is unsustainable. The CMHC policy changes do not and can not change this blog's thesis one iota.
No comments:
Post a Comment