In 2008 the financial world came crashing down. One of the primary causes were mortgage lending practices in the US and throughout most of Europe. The lending practices were loose at best and predatory at worst. When the house of cards came crashing down there was a rash of foreclosures that many economies have yet to recover from.
Here in Canada we mostly avoided the international banking crisis. Some of our banks experienced steep losses due to the risky practices; however, the government bailed none of our banks out. We also didn’t see the wave of foreclosures that many other countries suffered. This was due to the fact that our mortgage lenders never got quite as reckless as their counterparts in other, more cavalier parts of the world.
The Canadian real estate market saw a major dip in early 2009 that quickly rebounded. First time buyers who had been waiting on the sidelines hoping for a drop in prices saw their opportunity and pounced, particularly in expensive markets like Vancouver, Calgary and Toronto.
We are still dealing with the effects of that crisis. This is most obviously manifested in the super-low interest rates that are still available. The prime rate offered by most banks has been 3% for over 2 years now. That is historically super low. The Bank of Canada would love to raise their key lending rate (which has held steady at 1.25% since September of 2010), but that prospect is too risky. It would increase the value of our dollar and most likely negatively affect the Canadian economy in general, particularly exports.
Thus, fueled by those low interest rates, the Canadian real estate market rebounded quickly in 2009 and has had a full head of steam since then. The market has been fueled by the low interest rates. That is where CMHC comes in. The Canadian Mortgage and Housing Corporation influences the mortgage market by providing mortgage insurance on loans that are deemed to be too risky by the banks. In order to provide the banks with peace of mind the mortgage. For example, if you have only 5% available for a down payment, the banks deem you too risky, so you have to buy insurance on yourself in order to qualify for the loan. In order to try to calm the Canadian real estate market the government has been changing the rules at CMHC.
The government has been very savvy in the way they have changed the mortgage rules. They have done it incrementally with small changes in 2008, 2010, 2011 and again in 2012. It is when you look at where the mortgage rules were in 2008 and where they are now you see the dramatic changes that the government has implemented. The Canadian market as a whole has been cooling lately, with the biggest slow downs being in Vancouver and Toronto. Those are the locations that the government wanted to have the biggest effect on. It looks like they accomplished that mission.
The most profound changes implemented affected amortization periods. In 2008 you could get a CMHC insured mortgage with up to a 40-year amortization. They have incrementally reduced that to 25 years. That shortened time frame dramatically decreases the amount of house that a first time buyer can afford.
Other major changes are the elimination of 0% down financing, which could be had in 2008. There were some loopholes that still allowed you to get 0% financing until recently, but those loopholes were effectively closed with the latest round of changes implemented. Until 2010 you could get CMHC insurance on investment properties with 5% down. They changed that to 20%.
In my opinion the best change to CMHC rules was the change the criteria for home equity lines of credit and secured lines of credit. They reduced the amount that people could borrow against their house to 65% of the appraised value. This rule protects people from treating their home like a cash machine and protects their equity position in what is very often the most valuable asset they own.
The mortgage changes that have been implemented by CMHC over the past 4 years never looked like much as they were being implemented. However, when looked at as a whole, they are profound. The government is trying to protect Canadians from a housing crash like what was witnessed in the US and Europe. While some changes may be too severe I think they have done the right thing.
Kevin Kurjata is a Dawson Creek Real Estate Specialist with Remax Dawson Creek Realty. He can be reached by phone at 250.719.3538, email at firstname.lastname@example.org or visit him online at www.kevink.ca. He is currently accepting new clients.