New Barriers for First-time Home Buyers
It’s no secret that the residential real estate market relies on a steady stream of first-time home buyers. A constant and consistent demand from young buyers is what keeps housing prices from declining.
Unfortunately, new mortgage rules are making it harder for cash-strapped buyers to qualify for current real estate prices. In a logical economy, housing prices would have to drop in order for new home buyers to handle the restrictions. But as we all know, things are rarely rational when it comes to the economy.
Mortgage Rules That Are Impacting New Homebuyers
New mortgage rule restrictions that impact home buyers include a new maximum amortization of 25 years and a cut in the maximum gross debt service ratio to 39 percent. At this point, it’s tough to predict the impact that fewer first-time home buyers will have on the market as a whole. Experts insist that the changes will help long term price stability, but the short term impact could be dramatic. Genworth Canada expects that these new rules will eliminate 15-20 percent of their high mortgage business. Not surprisingly, first-time buyers (those between the 25-34) account for the bulk of high-ratio mortgage customers.
While these mortgage rules have helped slow down the market and curb debt levels, the impact on real estate prices has been minimal. This has caused some experts to feel as though many of these mortgage rules are being overdone to compensate for the current trend of low mortgage rates. Eric Lascelles, chief economist at RBC Global Asset Management feels that current changes could come back to bite Ottawa in a few years. “I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized.”
While housing prices in the States appear to be bottoming out, the Canadian market is set to peak. Craig Alexander, chief economist at Toronto Dominion estimates that national home prices are currently 10 to 15 percent too high. TD further estimates that the new mortgage rules will only be able to knock down housing prices by about 5 percent. What’s more, historical housing data shows that prices tend to roar back quickly, often within just a few months.
Other Factors to Consider
While new mortgage rules have shown a weak spot in the first-time homeowner market, there are worries that stricter underwriting could feed into other, more serious factors. These include:
- Interest rates: A small 1 percent hike in interest rates could impede the average household’s buying power by nearly 9 percent. While rate hikes don’t appear to be on the horizon, that’s not enough of a reason to turn a blind eye to this impending disaster. Homeowners will continue to borrow as long as rates stay low, which in turn could cause Ottawa to resist raising rates. And the cycle continues…
- Too much supply, limited demand: Supply hasn’t overwhelmed demand in the Canadian real estate market since 2008. This could change dramatically if first-time buyers find they’ve been locked out of the market.
- Employment: Job loss and wage cuts have a direct impact on home values. While there’s no obvious downtown on the horizon, the economy has a tendency to shift quickly.
- Psychology: This is by far the most unpredictable factor, and thus the most frightening. Three months of headlines proclaiming housing price drops could spook buyers and sellers.