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Daniel Bloch finally heard details of fed­eral Finance Min­is­ter Jim Flaherty’s mort­gage rule changes when he was watch­ing the evening news.

“I was a bit sur­prised when I learned some of the details but it’s not too bad,” said the Cen­tury 21 Her­itage Group Ltd. real­tor in Thorn­hill, Ont. “You just have to adapt and adjust. There’s really not much else you can do.”

Almost ten days after Fla­herty announced he was tight­en­ing mort­gage rules for the sec­ond time in a year, real­tors and mort­gage bro­kers across the coun­try say its busi­ness as usual.

But record low inter­est rates could be another entirely dif­fer­ent story.

“I actu­ally had three of my clients who were first time home buy­ers that asked about it, but oth­ers weren’t even aware of the changes. There was one other client who didn’t like it… the down­pay­ment was already an issue with them, though,” Bloch said.

One vet­eran Van­cou­ver mort­gage bro­ker, who asked not to be named, saw it as “gov­ern­ment back­track­ing” on their ear­lier deci­sions. The Con­ser­v­a­tives allowed the Canada Mort­gage and Hous­ing Corp. to lift its 25-year limit on mort­gages in 2006 and insure them up to 40 years.

“Then he brought then 40-year term back to 35 years in 2008 and this was just try­ing to cover up on that ini­tial deci­sion,” he said. “Ulti­mately they are just try­ing to hide their ear­lier mistakes.”

“Smart home buy­ers should still lock in their mort­gages before the changes come into effect on March 18^th.”

Fla­herty said he was short­en­ing the max­i­mum amor­ti­za­tion period to 30 years, from 35 years, and low­er­ing the refi­nanc­ing limit from 90% of a home’s value to 90%. He added the gov­ern­ment was also with­draw­ing insur­ance on the pop­u­lar home equity lines of credit.

The move comes after con­flict­ing reports about Cana­di­ans and their abil­ity to han­dle debt. Sta­tis­tics were released show­ing Cana­dian house­holds were still pil­ing on debt amid his­tor­i­cally low inter­est rates. Sta­tis­tics Canada ana­lysts reported the aver­age Cana­dian house­hold debt at a record 148% of income, and the debt-to-income ratio is higher than in the United States.

In a new research report released Wednes­day, how­ever, econ­o­mists at the Cana­dian Impe­r­ial Bank of Com­merce had another point of view.

“The Bank of Canada con­tin­ues to warn Cana­di­ans about the risk of rapidly ris­ing house­hold debt, but the real­ity is that slowly, behind the scenes, credit growth is already soft­en­ing,” wrote econ­o­mist Ben­jamin Tal, of CIBC World Markets.

Tal said that trend first showed in the third quar­ter of last year, with inflation-adjusted credit growth dur­ing the last quar­ter drop­ping to the slow­est pace in more than nine years. He added it was also the third quar­ter when the Cana­dian crit­i­cal debt-to-income ration reached the record 148%.

That could mean that when inter­est rates rise, the car­ry­ing costs of that debt can cause prob­lems for con­sumers. But it doesn’t nec­es­sar­ily show the national mort­gage mar­ket is headed towards a melt­down sim­i­lar to what hap­pened in the United States, said Tal.

In order to trig­ger such a bust, the high debt lev­els must be accom­pa­nied by a three or four point jump in inter­est rates or a cat­a­strophic event like the sub­prime U.S. mort­gage cri­sis. Canada has never faced either of those last two sit­u­a­tions, he said, and “that’s why we could have an over­shoot in hous­ing prices with­out hav­ing a bub­ble or bust.”

It wasn’t the first time CIBC econ­o­mists have down­played alarmist fears in the hous­ing mar­ket. The bank’s chief econ­o­mist, Avery Shen­feld, dis­agreed in late 2009 that Cana­di­ans were headed for a “U.S. style hous­ing and mort­gage blowup.”

Tal pre­dicted this week that although high debt lev­els can cause stress for con­sumers, their finan­cial health is oth­er­wise strong The only risk present is that the econ­omy will slow dur­ing an already grad­ual recovery.

“Inflation-adjusted growth in house­hold credit in the third quar­ter of 2010 was the slow­est in more than nine years, while the 0.27% increase in credit dur­ing Octo­ber of last year (the lat­est avail­able data point) was the soft­est monthly read­ing in more than 15 years,” he said in his report.

“Con­sumer spend­ing in the past two years was by far the most lever­aged in recent his­tory but this trend is start­ing to normalize.”

“Growth in con­sumer credit is already decel­er­at­ing (mainly in sources that are used largely for con­sump­tion such as credit cards and lines of credit). And as the ratio of growth in bor­row­ing to spend­ing returns to nor­mal in 2011, look for growth in con­sumer expen­di­tures to take an addi­tional hair­cut,” Tal added.

Ana­lysts from other banks echoed the con­cern that record inter­est rates, com­bined with high debt loads, could still cause prob­lems for the Cana­dian econ­omy. And they might be going up sooner than most peo­ple think.

“If you believe that inter­est rates are nor­mal right now, you are suf­fer­ing from seri­ous delu­sional think­ing. They will be going higher,” said Sco­tia­bank Chief Econ­o­mist War­ren Jestin told a St. John’s Board of Trade meet­ing last week.

He also pre­dicted inter­est rates would con­tinue to trend higher, and those who took on high debt may get taken by sur­prise and default on their loans when rates sharply go back up again.

Fla­herty likely con­sid­ered it impor­tant to act now rather than includ­ing the changes in the upcom­ing fed­eral bud­get because of the risk of an elec­tion, Michael Gre­gory, a senior econ­o­mist with BMO Cap­i­tal Mar­kets, added in his own research report. If one of the three oppo­si­tion par­ties opposed the bud­get in the House of Com­mons, it could have sparked an elec­tion because the Con­ser­v­a­tives do not have a major­ity government.

“…these mea­sures were obvi­ously deemed too impor­tant not to be passed and put in place for when Canada’s hous­ing mar­ket wak­ens from its win­ter slum­ber,” Gre­gory wrote in his report.

The Cana­dian Asso­ci­a­tion of Accred­ited Mort­gage Pro­fes­sion­als (CAAMP) released their own report just after Flaherty’s announce­ment show­ing the risk of mort­gage rates ris­ing to unaf­ford­able lev­els in the near future is “negligible”.

The group’s chief econ­o­mist Will Dun­ning explained that a major­ity of buy­ers left them­selves a bit of room to absorb an increase of 1% on fixed rate mort­gages and even higher on vari­able ones.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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