Over the past six years, federal Finance Minister Jim Flaherty has influenced the Canadian residential real estate market by making a number of changes to the Canada Mortgage and Housing Corporation’s (CMHC) guidelines for insured mortgages. While I have often called for more oversight of the market to ensure its health, the policy decisions that Flaherty has elected to implement endanger it instead.
Let’s start with a bit of background. Prior to 2006, any homebuyer with less than a 25% down payment needed to purchase mortgage insurance and the amortization on their mortgage could not exceed 25 years. In 2006, the federal government increased the maximum amortization on insured mortgages three times with the final change pushing it to 40 years.
These changes effectively allowed a home buyer to spend 30% more on a home. Put differently, a first time buyer with a 5% down payment whose maximum budget for a house in 2005 was $285K could suddenly spend $370K on a home in 2006.
It’s no surprise that this added fuel to an already hot real estate market in 2006 and encouraged Canadians to take on even more debt which contributed to the increase in household debt we often hear Flaherty and Carney talking about.
Since then Flaherty has backtracked by introducing several new changes to tighten CMHC’s guidelines, the most recent of which took effect in July 2012 and saw the federal government decrease the maximum amortization on insured mortgages from 30 years to 25 years.
Flaherty was prompted to make the changes because of the high volume of construction we are seeing in Toronto’s condo market. From the Globe and Mail
“In Toronto in particular, what I’ve observed and heard about from developers is continuous building without restriction,” Mr. Flaherty said. “It’s distorting the market, quite frankly. And for that reason, we’re taking the steps we’re taking.”