Canada's spring housing market could be hotter than usual following the federal government's announcement of changes to mortgage rules.
As of April 19, borrowers will have to meet stiffer criteria to take out mortgages. Add to that an expected rise in rates and the added cost on a new home when the HST goes into effect in Ontario and B.C. on July 1, and analysts expect a mad rush of buyers.
"The whole spring housing market is going to be on fire," predicts Derek Holt, vice-president of economics with Scotia Capital.
On the flipside, the market could experience a significant slowdown toward the end of the year.
Under the new rules, borrowers wanting to qualify for an insured mortgage will have to meet the standards for a five-year fixed-rate mortgage even if the interest they are paying is less. The government will also limit the amount Canadians can borrow on their homes from the current 95% of the value to 90%.
The minister insisted there is no housing bubble in Canada as yet but added that with interest rates set to rise as early as this summer, he wants to ensure Canadians don't take on too much debt.
A new report suggests the danger is real.
A study by the Vanier Institute of the Family says that average household debts loads climbed 5.7%, to $96,100 in 2009. The institute estimates some 1.3 million households could be vulnerable to a dangerously high debt service load by the end of 2011.
TD Canada Trust president Tim Hockey estimated the rule change will effect up to 10% of buyers, some who will choose not to buy and some who will opt to buy a smaller home.
Some stakeholders were expecting more dramatic changes from Flaherty, such as doubling the minimum down payment on purchases to 10% or further reducing the 35-year amortization period. Those measures would have shut out a significant number of Canadians from the market.
"We would have opposed [those changes]," says Dale Ripplinger, president of the Canadian Real Estate Association. "We were very concerned the government would overreact."
Although some prospective homebuyers will not welcome the changes, TD Bank economist Craig Alexander says the impact on most homebuyers will be minimal.
"All this change does is limit the size of the mortgage you are going to be able to get; it doesn't prevent people from buying homes, it doesn't drive a lot of new homebuyers out of the market and it doesn't lead to higher payments," he explains. "It means if you are thinking of buying a $400,000 home, you may have to buy the $350,000 one."
But Hockey predicts many more buyers will jump into the market in order to beat the April 19 deadline as well as stay ahead of rate increases and the HST.
In a news conference, Flaherty said he sought a middle ground between doing nothing and taking more drastic measures.
"On the one hand, we don't want to discourage Canadians from home ownership," he said. "On the other hand, we do want to discourage a tendency by some to use their homes as an ATM."
