Thursday, December 15, 2011

Isn't It Subprime to Need a Loan for a Downpayment?

Housing industry shy on new rules
The government did move about three years ago to require Canadians to have a 5% down payment, increasing from zero. However, most of the major banks allow for a cash back option. Mr. Clark’s own bank will give you 5% of your mortgage principal up front if you lock in a mortgage for five years or longer.

“A really damaging move would be significantly increasing the amount of cash a young family would have to have to qualify for a mortgage. It would take a lot of transactions out of the marketplace,” said Mr. Soper.
According to the article, the RE industry is more open to returning amortizations to 25 years than they are on tightening rules about downpayments. I guess that follows. 0% down at 30 years is leverage at 186:1 (total mortgage over first payment) and 0% down at 25 years is 170:1. Whereas strict downpayments at 5% is 20:1 leverage. It's the leverage the industry (which lives and dies on churn) can't bear to have touched.

Nevertheless the government has targeted condominiums during this housing boom. It now forces investors to have 20% down to qualify for mortgage default insurance, up from the 5% it requires for owner-occupied buyers.

Still there remains some scuttlebutt the government will tweak the condo rules again with one suggestion being that 100% of condominium fees count towards debt obligations when considering how large of a mortgage a consumer can get.
Wow, they are actually doing something to tame speculation.

Gregory Klump, chief economist of CREA, said the figure is misleading if you look at the number of unoccupied condos as an absolute number. But if you normalize it as percentage of unabsorbed inventory, it’s not historically high.
I have no idea what that means. Anyone?


jesse said...

I think they're already doing more, it's just not explicit. All the talk is around CMHC curbs, which is at the margins, but leaves low-ratio to the free market. That's likely going to change with new risk management measures being phased in over the coming years. It could be the government will require the advance the adoption of some of these measures -- such as requiring higher reserves on residential mortgages -- to handle excesses in the low-ratio part of the market.

Not that I know anything, it's just something I would do if I were risk management Czar.

I think what Klump was stating that people are holding units vacant and it's not an indication of so-called "shadow inventory" because these units won't immediately come onto the market. We'll see!

GG said...

Ah. I see. He's arguing that shadow inventory won't suddenly jump on the market at the first sign of the value dropping. Got it. Thanks.

Anonymous said...

So it's not a big deal that the total number of unoccupied condos is at historic highs because as a percentage of the total unabsorbed inventory it's lower than 1990 just before real estate prices crashed.

If the number of unoccupied as a percentage is low then unabsorbed inventory must be very high. Therefore, the number of unabsorbed + unoccupied must be extremely high. "But don't worry about this excess supply at a time when public household debt is at record levels, interest rates are at record lows, and developed economies everywhere are being forced to contract credit!" Must be a really good time to buy a condo in TO and Van!