Canada dropped some new real estate demand stimulus, in the name of improved affordability. Last week, the Government of Canada (GoC) announced they’ll be extending amortizations for first-time buyers in certain circumstances. There are concerns this will pour gas on the speculative fire that was finally starting to fizzle out. BMO disagrees with that take, arguing the segment of buyer is too small for it to make a material difference in the market.
Canada Letting First Time Buyers Take Longer To Pay Off Their Mortgage
Canada’s latest update to mortgage rules will extend amortizations for first time buyers. The current maximum mortgage length will be extended from 25 to 30 years, allowing borrowers to extend their repayment for longer. The new rules go into effect August 1, and will only apply to insured mortgages used to purchase new construction.
This is the latest in demand-side measures rolled out by the government over the past few years. Generally speaking, demand side stimulus is used to create more demand for an asset rather than letting prices fall. They’re essentially changing the rules to allow first time buyers to borrow more money, rather than letting prices correct to the maximum they can pay.
Naturally, this has created a few concerns that they’re stoking the market. BMO sees some issues, but doesn’t see this creating a large impact.
Mortgage Changes To Target A Small Share of The Market
The bank argues the potential market for these loans is very small these days. “We don’t have a precise estimate on the share of housing activity that this will cover, but suffice it to say that the policy change drills down into a small segment,” explains Robert Kavcic, senior economist at BMO.
Adding,“First-time buyers are just under half of transaction activity, with their share falling in recent years while investors and move- up buyers have gained.”
That’s at the national level. More expensive regions like Ontario saw first time buyers represent just one in five transactions.
Source: BMO Capital Markets.
At the borrowing level, insured mortgage originations are a relatively small share of total mortgage demand too. The bank’s calculations show just 15% of new originations were insured.
New Mortgage Measures To Have Little To No Impact On Affordability
As for helping affordability in this “sliver of the market,” the bank also had its doubts. The increased amortization will add around 8% to buying power at a 5% mortgage rate, with a fixed downpayment.
“This could shift some incremental activity toward new builds among first-time buyers (until prices adjust), but the overall market impact should be limited. And that’s a good thing, as juicing demand is rarely the right prescription for a market already struggling with excess demand,” explains Kavcic.
Though it’s worth considering that frothy markets are driven by narrative, not rational response. In which case, it’s possible it was known this would have a limited impact. The real goal could have been to send a message the market is getting stimulus, so no need to stop any activity.
Small share but material impact is based on the margin. It doesn’t matter if you don’t want to use the program, you’re now competing against people who do which is why the excess credit capacity causes home prices to rise.
Important note, but I think Daniel’s point this is really to make investors feel comfortable is really the key.
Or to provide liquidity to pre-sale speculators. Investors (especially foreign investors that are restricted), can’t close and they need a person to take it off their hand. Oh look, first-time buyers now have the exact amount needed to help them profitably dispose of their properties. Nice coincidence, eh
Parma bear Kavcic underestimating how much liquidity this provides.
Like the ham?
Would like to see something on the borrowing binge Canadians are doing to back real estate developers. I’ve never seen something so dumb as raising bond yields (and our household/business borrowing costs), just to make developers more profitable.
Get Daniel Foch or Stephen Punwasi to write it. They’re the only two that mentioned it on twitter. They should elaborate.
Will like Japanese in 1986-1990.
Three generations to take the mortgage.
Good luck to our grandchildren
Who’s having grandchildren?
Birth rates have plummeted because it’s so hard to live. That’s only getting worse in any foreseeable future.