Weekend Reading – Are new mortgage rules helpful?
Welcome to a new Weekend Reading edition – are new mortgage rules helpful?
My summary on the mortgage news and my take on such news after these reminders…
I shared my long-term ownership for dividends and growth in this U.S. company below:
With unemployment rising, which is not ideal, could there be a recession on the way? How would you navigate that – how might you survive the next recession if it happens in 2025?
Weekend Reading – Are new mortgage rules helpful?
I’m really not sure, and in fact, I’m not convinced. 🙂
Source: Pexels.
The big news of late in mortgage-and-home-buying-land is that our Federal Government has introduced 30-year amortization periods for all first-time homebuyers and all buyers of new builds, regardless of whether it is their first home. (This new rule extends beyond the longer amortization period that recently only applied to first-time homebuyers of new builds including condominiums.)
At the same time, it was announced effective December 15, 2024, mortgage insurance qualification has increased to cover houses that cost more than $1 million, up to $1.5 million.
Will this work – why were the changes made?
Well, there is a massive housing shortage in Canada. Housing scarcity has triggered an affordability crisis – supply and demand. As younger buyers attempt to get into the housing market vs. renting, the government wants to extend the amortization period you can take – which is essentially: take out debt / take on more debt to own a home over a longer period of time.
In major cities like Toronto and Vancouver, where the cost of any “average” home is now valued at over $1 million (and certainly much more depending on the neighbourhood and home of course), one could argue extending mortgage-lending terms is an easy win. But there are big impacts to consider…
Impacts for Buyers – with interest rates coming down and likely moreso in 2025, new rules mean paying for a house will be stretched across more years, reducing the monthly cost. It basically helps better manage your cashflow and mortgage payment.
In addition, the new cap on the value of homes that qualify for insurance means anyone buying a home that costs between $1 million and $1.5 million will no longer need a sizable 20% downpayment.
In terms of buyers who are investors of real estate, I’m not sure we’ll see a big shift with these changes but that is possible since speculators may consider capitalizing on existing equity to buy up more property.
Impacts for Lenders/Banks – in short, there will be a shift in risk management between the lenders and insurers that are backstopped by government: more mortgages are going to be purchased in higher value up to the new mortgage insurance qualification threshold which means our government is going to carry more of the housing risk.
(Recall, Canada Mortgage and Housing Corporation (CMHC) refers to a Canadian Crown Corporation that serves as the national housing agency of Canada. The goal of this agency is to make mortgage loans affordable for all Canadians through a housing development strategy and mortgage insurance, among other initiatives. Established in 1946, the CMHC is headed by a board that reports to the federal housing minister. There you have it….)
As credit risks may come down for Canadian banks, you might want to consider what impacts that might have on their stock price. 🙂
Impacts for Real Estate – more/higher home sales is my prediction. These changes, along with lower rates coming down into 2025, are going to drive more folks into the existing pricey-housing market and drive scarce homes even higher in price. Existing rules and recent interest rates have been a natural barrier to entry. The government is trying to knock-down those walls…
Weekend Reading – Are new mortgage rules helpful? – my take
You can likely appreciate from my tone in today’s post that I don’t really believe these mortgage rules are helpful – except to maybe shareholders of our Canadian financial system.
I read this article that mentioned @CMHC_ca CMHC estimates Canada needs to build:
“…at least 3.5 million additional housing units by 2030 to restore affordability.”
Yikes.
Instead of political gimmicks, I would prefer there is a fundamental shift in the types of homes we build (more density, less McMansions), where we build them (in the city vs. more suburban land that increases taxpayer dollars to extend services), and more incentives provided in terms of using sustainable materials – that when combined appropriately will focus on increasing supply to mitigate demand vs. time spent on changing mortgage rules.
Similar to signing up for 72-month or even longer 84-month car loan terms offered by some car manufacturers these days, any “rules” that encourgage more government risk with more individual risk/debt is not the best approach.
(Disclosure: I am debt-free, I have a bias to remaining debt-free and your mileage on this subject may vary.)
What do you make of these new mortgage rules or CMHC rules? Good for you or your family/kids?
Thoughts?
More Weekend Reading – Are new mortgage rules helpful?
My friend Kyle Prevost worked with MoneySense this week to help make sense of the markets. Certainly, challenging to do that on a “good day” – the markets are way up this year, unemployment is moving up, debt burdens are moving up too! What our Bank of Canada is trying to do is the same thing the Federal Reserve is trying to do:
“Federal Reserve Chair Jerome Powell said, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal.””
I was reflecting on some older posts this week and found this gem from Farnam Street – things you control:
“Your effort.
Your beliefs.
Your actions.
Your attitude.
Your integrity.
Your thoughts.
The food you eat.
How kind you are.
How reflective you are.
How thoughtful you are.
The type of friend you are.
The information you consume.
The people you surround yourself with.”
@JimChuong has a point when it comes to your money and your mortgage:
Interesting selections from Jon Chevreau’s site who listed a few industry experts that revealed their favourite index funds for financial independence.
On that subject, as many passionate readers will be aware, I own a few equity ETFs in our portfolio: lots of XAW, a bit of QQQ for tech-growth, and HEQT as a lazy all-world-ETF for my set-and-forget LIRA. In fact, you might recall since I eat my own cooking that if I was forced into owning just one ETF to rule them all, a desert-island pick if you will, I would choose HEQT for its low-cost, diversification benefits and tech-kicker holding inside that global fund.
YTD in my portfolio:
- XAW is up about 19%.
- QQQ is up close 20%.
- HEQT is up about 17%.
Boring can be beautiful!
(You can read about my investing journey with my LIRA here.)
Some good reading on instrinic value from Dividend Growth Investor – one of my favourite sites.
“As we have discussed before, investing is a game of trade-offs. The optimal path is to have the right margin of safety along those various trade-off paths.”
A lot of financial planners and wealth managers do not like dividends, do not like dividend income nor see dividend investing as an approach whatsoever. To each their own – all good with me. This article suggests the new capital gains tax actually puts dividend income in favour of any capital gains in some cases.
Capital gains tax hike results in rate inversion for some Canadians
“The federal government’s decision to increase the capital gains inclusion rate (CGIR) to 66.7% from 50% on gains above $250,000 realized by an individual, effective June 25, has reduced the tax advantages of capital gains across all provinces and territories relative to dividends.”
From Baskin Wealth, they are very bullish on Brookfield. So am I. I happen to own quite a bit of BN (the parent) along with BIPC and some BEPC in our portfolio.
Have a great weekend and happy investing!
Mark
So many thoughts on this topic. Here’s some bullets of what I think:
– 30 years works in the States – yes different rules, but I don’t think, in of itself, it is a problem. Part of my view on this is that over time the mortgage payment becomes a smaller and smaller percentage of income so with proper planning it will be possible to pay off before 30 years.
– Agree with others – ultimately we have a supply problem. I have a neighbour who designs homes for a few of the major GTA builders. He has shared many stories about the ridiculous municipal hurdles that have to be jumped over for permitting and approvals. There isn’t nearly enough focus on this in the media. I’m sure the provincial and federal governments can move some levers, but as I see it – this is the #1 thing that has to change to help drive the housing supply up. It’s a bit counter-intuitive to me – one would think that the municipalities would be anxious to increase their tax base – but I guess there’s something else at play.
– I think it’s easy to overlook that like most things, housing is cyclical. I think despite these new rules, despite lowering interest rates, we are going to enter a period of declining home values, despite a pick-up in demand. Like other commenters, I can willingly accept a reduction in the price I get for my home, knowing that there will be a reciprocal reduction on the home I will eventually buy. Prices in my neck of the GTA are down at least 10% from this time last year, and it looks like they are headed even lower.
– Back to 30 years – it will lower the entry point. I’m not big on the car loan comparison given that a car is inescapably a depreciating asset, whereas a house is not (at least over long term ownership).
– I saw a chart recently of average house appreciation since 2005. If I drew a trend line from 2005 out to 2025 we’re about right on track for where the long term average price might land. That trend line cuts a mean strike through the COVID real estate bump. I think prices dropping about another 10% is probably where we will land, and then resume the historical trend up within 12 – 24 months (maybe longer).
– This rudimentary analysis of the house appreciation trend line is fine – but for many in the workforce wages have not kept pace, so even if my view of housing prices resuming to something approximating normal comes true – it doesn’t change the fact that affordability also requires wages to move up in tandem with inflation and in my opinion a large gap remains there.
– I think increasing the FHSA contribution room could help mitigate some of these issues as well.
Wow, great comment, James.
Yes, on the supply problem – the premise of my post/rant. 🙂
I ultimately see a home as a place to live. Yes, sure, it would be great it if appreciates lots in value over time but that’s not my focus at all. I do other things to invest. I know you do too!
Kudos on your investing success and growing dividend income stream. Once you’re out of debt you are set I think!
Mark
As a mother of two, I am really concerned about their future regarding not only to high real estate price, but also shortage of doctors and nurses, not enough schools, far behind infrastructure, etc. etc. Canada is a great country, but life is becoming harder and harder for younger generation, and as a society we are so much behind of almost everything. As we are seniors now, looking at the long waiting list of public facilities, I think we might have to go private when time comes which will be very expensive.
We are planning to help with down payments for our kids when it’s time to buy their first residence. That’s never our plan as we came to Canada without money and we make a good living including a big house on ourselves and we always expected our kids can do better than us. Now I just feel our kids are fortunate that we have capability to do this. But of course I would rather they can do this themselves.
I really don’t mind the value of my house not going up any more or even going down. I just want younger people to be able to make a good life like we did, not struggling between mortgage payments and grocery bills.
Well said, May. re: “I really don’t mind the value of my house not going up any more or even going down. I just want younger people to be able to make a good life like we did, not struggling between mortgage payments and grocery bills.”
Real estate inflation and lack of wage grow that delivered a double-whammy. My personal opinion is more housing, less scarcity should help resolve. That’s only part of our issues in Canada now along with a shrinking healthcare sector. I’m included in that, and will be leaving that full-time workforce in another year or so but I would like to work part-time and hopefully my employer can see the benefits of me remaining (part-time) too. We’ll see?!
Mark
Those new mortgage rules will only benefit the banks (longer term mortgage means more interest payments from borrowers) and enrich the builders even more (by increasing the sales price as more buyers enter the market). I feel the pain for the new generations who are trying so hard to buy their property. Good luck to all those looking to buy their first homes.
Have a good day, Mark.
That’s the way I see it, Ken. Financial institutions should benefit from this long-term. The government won’t. The collective homebuyers won’t.
I remain (somewhat?) optimistic that if supply increases, prices will stabilize but not holding my breath.
Have a great weekend and thanks for your comment,
Mark
I’m not sure extending mortgages to 30 years will fix anything. Yes it will make it easier for new buyers but they will be paying more mortgage interest unless they have the means to pay it down quicker. If they have a mortgage for an extra 5 years then they will have less money to save or put into RRSPs or TFSAs. And with the government taking on more risk on mortgages I read that as taxpayers taking on more risk. The banks will have less risk and therefore more profit which is good for me as I have a lot of Canadian banks in my portfolio. I am also debt free with a home in Toronto. I’ll be fine but I do have concerns for my children and young people today. Not sure there are any really good answers to the housing problem now, at least none that I have heard.
It’s like saying “….here is a new car…I can lower your monthly payments for you if you want to take the 84-month term instead of 60-month term….that will save you some money”. Sigh.
Anyone with lots of Canadian banks in their portfolio is likely to benefit from this years from now.
Mark
Always a great read. Thank you for your service in putting this together every week.
You are very kind. Continued success on your financial journey. Your income stream is incredible and I have no doubt it inspires others. 🙂
Stay in touch my friend,
Mark
I can run into problems when housing costs come up at coffee. Some of the guys (and we are all old guys) will sit there and lament the high cost of housing for their grandkids and lambaste various governments and politicians for this difficulty. But will chortle and high five themselves for the appreciation of *their* houses. When it is pointed out that they really ought not to be playing both sides I get a little bit of negative feedback. Sadly, being the curmudgeon that I am, I can’t help myself for pointing out the hypocrisy we sometimes fail to see in our opinions.
From a personal standpoint, when it comes time to sell our property, who the prospective purchaser(s) are will play a greater role than highest bid. I was given a great opportunity when I bought it, and will endeavour to do the same when I’m done with it.
As to the new mortgage rules, I haven’t paid any attention to them. One would hope that the dictum of ‘do no harm’ will prevail.
Very fair, Lloyd – I don’t blame the government for all housing issues for sure, I’m just trying to share my opinion that I believe the government does not have any clear priorities it seems when it comes to housing and their recent rule changes are simply an easy-win and not really aligned to problem-solving. 🙂 Could be just me though! All good.
I don’t think you are selling your place anytime soon? A few decades from now, maybe? Do share.
Mark
My health and/or ability issues will dictate the timing. It will not be decades though. Lots of hard living (and not very bright) has taken its toll. We’ve had ramping built for access for the wife but it is still not very compatible for disability living. We might look at doing some interior renos to alleviate, but the house has three levels on the main floor. Never considered those issues when we built.
Well, I hope for long-term health and happiness to you both, Lloyd. Keep me posted on your renos!
Mark
Hi Lloyd, its good that you brought up that point on the “generational squeeze”. I just came back from a weeklong conference (UBCM Vancouver) where the top issue we discused and continue to woirk for change is housing availability and cost. One plenary session had Paul Kershaw leading a big talk on how do we address the massive equity wealth in the boomer generation with their housing and transfer some of that into our society and the youth who may never afford a home now.
Here is a good summary article on that session with link to Paul as well the insights from Economist Bryan Yu.
https://www.vancouverisawesome.com/highlights/ubcm-housing-crisis-requires-crisis-response-delegates-hear-9528234
Thanks very much for sharing, Chris. Appreciated. Likely a very good / important session to discuss!!
Mark
Just ya Lloyd. I don’t get why people now who bought at much lower prices take pride and get excited about their own good fortune with housing paper gains. It simply happened. People buying now or not owning at all don’t seem to have the same ‘fortune’ and those of us lucking out having much lower cost housing should not gloat. I would be happy to take a knock down on the value of my paid off home if it could benefit those trying to enter or in a high payment situation. Unfortunately I guess that’s not possible.
The new rules try, but are only going to stimulate more housing demand driving prices up and not at all do what we need to do- that’s create more supply for potentially less competition and lower prices. The changes now are about votes.
Great comment. Very much about timing including votes. Sigh. I really dislike government decisions for gimmicky reasons.
Have a great weekend and chat soon.
Mark
Thanks. Yes, on votes and government gimmicks. Too many years of seeing that here!!!
Yes, indeed my friend!
Hi Mark,
I’m on the same page as you re: the new mortgage rules announced this week. Disclosure: I am also debt free (coming on 17 years now). Actually I’m allergic to debt!
Take care…CJ
Wow, 17 years debt-free. Amazing. Gotta tweet that out for you. 🙂
Take good care CJ. I enjoy your comments.
Mark