What’s so interesting?
According to this Globe and Mail article, the heads of Canada’s big 6 banks privately have told policy makers in the Canadian government to tighten mortgage rules, fearing a U.S. style meltdown could play out in Canada.
A couple of ideas have been brought to the table. Specifically, they’d be looking at raising the minimum required down payment from 5% of the property’s value to 10%. The maximum amortization would also be cut back from 35 to 30 years.
Here’s the interesting quote from the article:
Mr. Carney didn’t disagree, according to people familiar with the November talks.
First of all, I’d caution everyone to take these talks with a grain of salt. Anonymous sources have placed Tiger Woods in about 12 different places since his Thanksgiving incident. I would hardly take the word of “familiar to the talks”.
This is a tough spot for banks and policy makers. The real estate market in Canada is up 19% compared to last year. Interest rates are at record lows. 35 year amortizations allow people to qualify for much more than they’d be able to on a 25 year amortization. The government, through CMHC, has made it about as easy as they can for the average guy to qualify for a mortgage. Sure, we didn’t lend money to just any dirtbag with a pulse, but we made it very possible for the average person to buy a home.
At what cost? Are the bankers right; are we on the verge of a real estate bubble in Canada? Or will we just experience a period of stagnant growth in prices? If the government changes the rules like the banks want, it has to have a negative effect on the housing market. Most people have a great deal of their net worth tied up in their homes. How popular would that move be, considering the consequences? The political implications of the move have to be at least considered, especially by a political party in a minority government.
So what’s a fella to do? Is Garth Turner right? Or crazy? Or, just maybe, a little of both?
Look, you gotta have a place to live. Sure, you can rent. And sometimes it even makes financial sense to do so. There are downfalls to both renting and owning. The people who claim that renting is cheaper because you don’t have to pay for big expenses are missing the big picture. Who do you think pays for those big expenses at the end of the day? (Hint: It’s not the landlord)
Shelter is something that one must pay for throughout their life. I’m not smart enough to try to time the real estate market and neither are you. Whatever you do, just know that over time real estate will go up slightly more than inflation. If you think values are going to come down over the next little while and you rent currently, it probably wouldn’t be a bad idea to continue to do so. If you already own a house, I wouldn’t try to outsmart the market.