Canada's Housing Finance System
Tuesday, February 05
Is Canada's strong housing finance system still a reality? The Canadian economy seemed to be in very good condition for a long time, which also suggested a stable housing finance system. We managed to deal with the financial crisis much better than other countries through good management, hard work, and a bit of luck. Recently, experts delivered reports on the reasons for our economy's outstanding performance. Let's summarize some of the main points that are often cited as reasons for minimizing the impact of the recession on the Canadian economy.
First of all, our mortgage system assisted potential home buyers across the social spectrum to get access to reasonable housing that they were able to afford. Mortgage lenders traditionally chose a more conservative approach, and risks were carefully assessed loan by loan. Furthermore, the housing finance system was believed to maintain a competitive environment among lenders, leading to a diverse market with a variety of products that served all Canadians, carefully supervised by larger institutions.
According to financial planner Lorne Marr, another reason for Canada's recent success could be our ability to bridge gaps in the system. While 80 per cent of Canadians are able to reach for the mortgage they need without assistance, 20 per cent of low-income citizens were aided by government programs administered by CMHC. Unlike the U.S., where large bodies partially sponsored by the state couldn't determine their role on the market, leading to a disastrous lending policy to insolvent customers, Canada managed to separate business and assistance programs.
The future, however, doesn't seem that optimistic. Analysts are starting to talk about the inevitable burst of the real estate bubble in the Toronto and Vancouver condo markets. Some experts are predicting a more-than-25-per-cent crash. Canadian housing prices don't seem to be sustainable anymore, and Governor Carney quoted excessive mortgage-related lending as the number-one domestic risk to the Canadian economy. To tackle this messy and largely unpredictable threat, economists and politicians have undertaken steps that suggest hard times to come.
Flaherty's government announced several changes to mortgage insurance rules, such as reducing the maximum amortization period from 30 years to 25. Additionally, the maximum amount of equity people can take out of their real estate ownership in refinancing is about to get lowered to 80 per cent from 85 per cent. In the future, no insured mortgages will be provided for home purchases above $1 million, and this new rule is introduced to ensure that the gross debt service ratio remains at a reasonable level for every family, as the ceiling is set at 39 per cent.
Right now, CMHC seems to take little notice of the overheating warnings in their analyses. The corporation forecasts a moderate rise of prices through to the end of the year and doesn’t expect any dramatic misbalance on the real estate market. Let’s all hope they’re right.