Friday, October 23, 2009

Policy advice for Mr. Carney

Dear Mr. Carney,

Today you made the following statements regarding the Canadian housing market:

"We expect prudence from lenders," he said. "We expect, and we have confidence in, prudence from Canadians. We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan."

That is a concise statement and echoes what many people have been saying for some time. However this appears to be a case of CYA so in 2011 you can say "hey, look! I told people to be prudent", while still allowing the heightened demand for housing contribute to precious green shoots.

You don't need to remind borrowers of anything. All that needs to be done is for CMHC to require qualifying income to be set for more normal interest rates. If CMHC ensured that borrowers could handle more normal rates that would limit the downside if/when rates increase. For example it would be more reasonable if CMHC required a qualifying rate of 6% to insure these mortgages.

Obviously people are qualifying and depending on super low interest rates. This has been going on for awhile. Consider the quote from the July 2nd article First time buyer like low rates:

What really helped? The 2.75-percent interest rate they were offered. It ultimately allowed them to move from a $1,800-a-month apartment into their own home.

“But we don’t have a lot of [wiggle] room,” Morettie said. “We can go up to four percent, but then we’re done.”



Alberta Oil Sands Investor Abroad said...

That's the point of low interest rates to help first time buyers get into homes. A call to the bank/mortgage broker can help the family you used as an example lock in before the rates hit 4%. It's simply a matter of watching the rates.

Radley77 said...

ALL homebuyers need to plan for a higher interest rate environment. If a family can't afford a 4% interest rate, then they shouldn't be buying, PERIOD.

Secondly, if one is to lock in a rate you generally are looking at paying the rate equivalent to a 5 year mortgage yields. In most cases, that will mean you will have to pay higher interest rates, as the forward curve for bond yields reflects a higher future interest rate environment. Currently, the 5 year mortgage rate is closer to 4%, so it is a given almost that if one was to lock in that it would be at a higher rate.

BearClaw said...

I think that the types of buyers quoted here are a fraction of first time buyers in Edmonton. So increasing standards would still allow more capable first time buyers to get into homes at lower rates.

Carioca Canuck said...

Lenders first of all have to go back to 30/40% GDSR/TDSR ratios.......

When I was a banker (1982-86)here's how we did want a mortgage ? OK.....start talking......

-Where is your downpayment from ? If it is a gift from parents or an inheritance, forget it !! You've got no skin in the game. Show me your bank account statements please, to prove a pattern of long term of saving, or some other way that this money is yours. Such as a previous sale agreement, etc, to prove an equity transfer. You need 15% down for a CMHC loan and 25% for a conventional loan.

-Rental income from a MIL suite was only counted at 50% of value, if we decided to do so that is. Oh, and I want to see the lease and will call your tenant without telling you about it.

-Condo fees, utilities, taxes, insurance, etc was counted in your GDSR, at 100% of the actual cost.

-Want an equity take out mortgage ? What are you going to use the money for ? If we don't like your reason, forget it.

-Regards your TDSR, if all your C/C limits on your credit bureau added up to $20K for example.....we used a repayment calculation based on you charging all that money out. Back then, if you owed $20,000 you'd pay $1,000 a month (5%) as the standard minimum payment......

-If you had an interest rate buydown on the mortgage from a builder for example, or a VTB at a lower than normal rate, we always qualified you at the current higher rate.

Today you have 35-40% GDSR and much higher TDSR equity or 5% loans are commmon place, all rental income is often counted, half of condo fees and zero of utilities are counted, equity take outs are no big deal anymore, TDSR ratios are higher and C/C limits don't even count for anything in the calculation, finally, qualifying at the current lending rate is rare.