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Wednesday, August 31st, 2016

Noose Tightens for Potential Homebuyers Standing on Edge – Find a trusted mortgage broker in Vancouver

Noose Tightens for Potential Homebuyers Standing on Edge

Adil J. Virani - Vancouver Mortgage BrokerAnyone who has worked in the real estate business knows how important first time buyers are for residential real estate prices; this includes your trusted mortgage broker in Vancouver. The fact is, new buyers make up a substantial volume of the water on which home prices float. Without them, prices would have a tough time maintaining any level of increase.

Why is this relevant? Let’s consider a situation where first time buyers currently on the brink of not qualifying, are no longer able to get mortgages. In the absence of other large changes in variables like the current low interest rates, home prices should fall until a new economic equilibrium is reached where the same buyers can now again qualify.

But in real life, the dismal science rarely plays out as a simple math equation. The first time buyer of today may not be so lucky.

As you are likely aware, a few recent changes have begun to affect young homebuyers unable to put 20% down.

Firstly, the maximum amortization period was cut from 30 to 25 years. Secondly, the maximum gross debt service ratio was lowered to 39%. Talk to a trusted mortgage broker for more information on the new rules.

As one of the companies affected by the changes, Genworth Canada, and Brian Hurley, its CEO, have some comments about the aforementioned rules.

“These are pretty dramatic changes, and I think they’re getting close to the tipping point. We see really qualified first-time home buyers with very high credit scores now not meeting the bar because they can’t afford a 25-year amortization. These people should be getting a home.”

Eric Lascelles, global asset management economist for RBC had the following to say.

“I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized…”

TD Economics also had some comments:

“There is little doubt that first-time home buyers – a market segment that has comprised as much as half of total Canadian sales in recent years – have been the most affected by the tighten­ing in mortgage insurance rules.”

Despite pundits’ comments and calculations, no one actually knows how hard (or how soft) the new rules will hit residential real estate valuations, by making real estate financing more difficult to access and removing some portion of the first time buyer segment. All we know (or have been told) is that the new rules should have a positive effect on the stability of long-term prices; many individuals involved in the business of real estate financing agree.

According to Genworth, approximately 15% to 20% of its business relating to high ratio mortgages will be eliminated because of the new rules; this will include many Vancouver home mortgages. This is important to note because according to CIBC, this young age group is responsible for the majority of high ratio mortgages.

Based on these figures, it might not be unreasonable to predict a 10%+ decrease in first time buyers due to the new changes. Though we would also like to note that TD doesn’t think prices will slide much more than 5%. This makes sense because historically, rule changes typically haven’t slowed sales for more than a few months. Visit a Vancouver mortgage broker for an unbiased opinion on the subject.

The big question becomes, what effect will the stricter rules have when combined with other factors affecting residential real estate?

Low interest rates: According to TD, housing prices will continue to inflate as long as we have access to low mortgage rates and individuals have incentive to continue buying. And at this point in time, low interest rates don’t appear to be going anywhere.

New supply: Despite rising inventories, particularly with condos, demand hasn’t been overwhelmed by supply since 2008.

Employment: Wage increases and job growth boost the value of homes. We don’t expect a large downturn for either in the near future.

Psychology: While “unquantifiable” would be an understatement, there’s no doubt that people’s reactions to news has an effect on home valuations and sales. Months of headlines such as, “X% drop in home prices” can play a large part in influencing potential buyers. The question is, how many?

Mortgage rules are simply one component in the mechanical bull that is home prices.

 

But while the new rule changes will not completely halt all interest in new purchases, more restrictive lending could have a strong effect when combined with other important variables. Contact an honest mortgage broker for more information on the pricing dynamics of the residential housing market.

 

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