Friday was a busy day for the feds. They shut down the temporary foreign workers program, mostly because all the damn Dutch were coming in and taking our jobs. WE’RE ONTO YOU, NETHERLANDS. Why don’t you put on your wooden shoes and ride your bikes back to your plentiful hookers and legal reefer? That’s four Netherlands stereotypes in one joke. I am the Gandhi of making fun of countries.
The other thing the feds did on Friday was announce the end of two CMHC mortgage programs. Effective the end of May, CMHC insurance won’t be available to folks who want to buy a second home. The federally owned mortgage insurer also won’t insure mortgages for self employed folks without third party verification of their income (which is typically two years worth of Notice of Assessments from the CRA). The press release painted the changes as no big deal, saying that the two programs only accounted for 3% of CMHC’s business.
Let’s look at the self employed program first. Most self employed folks qualify for regular CMHC loans, since they can easily prove what they make. They submit their 2 years of Notice of Assessments, the lender takes the average of the two, and that’s the level used to qualify. If you’ve only been self employed for a year and a half, you’re generally out of luck, since the insurer wants to see two years of history. It’s a bummer for self employed folks, since someone with a regular job can walk in and qualify for a mortgage after just weeks on the job.
As a former mortgage broker, I did a couple of these mortgages. The lenders would always insure them with Genworth, since it was well known in the industry that they were much more lenient than CMHC. I can’t imagine CMHC has many of these mortgages on their books.
A few months ago, CMHC announced they were increasing their rates, which the private insurers promptly matched. Normally, the private insurers will do the exact same thing as CMHC. Abandoning stated income mortgages might not be matched. They’re a much bigger pie of private insurers’ business than CMHC’s.
Now onto the second change, the elimination of the second home program, which was more abused than… Uh, let’s not finish that joke. Let’s just say people took advantage of it.
Across the country, mortgage brokers courted business of folks who already owned a house, and were jonesing to get into the rental game. So they’d go out, buy a nice condo (pulling out money from existing home equity for the down payment, because Canadians are prudent) and then the broker would tell the lender that the property is a second home, that the buyer has no intention of renting it out. It’s more of a blatant lie than the “let’s be friends” line during a dumping.
More Uproar: A massive piece about why the Canadian real estate market is screwed.
There are even investors who aren’t reporting the income they earn on these “second homes.” What? The government thinks it’s, like, a vacation home. Even though it’s a condo in the same city. Either that or there are a lot of generous people willing to put up their mother-in-law in her own condo for free.
We can all see the effect this will have. When you buy a rental property, CMHC changes a couple of things compared to a normal house purchase. First of all, insurance rates for rentals are up to 50% higher than for owner occupied homes, since there’s the underlying risk of a dirtbag trashing your place. CMHC will also let you use some of your rental income to qualify for the place, but only like 50% of it. And, of course, the biggest downfall is you just told the government that you intend to buy a house and rent it out. That bad if you intend on not paying the taxes on that income. Although, considering how low cap rates are across the country, there won’t be much left after expenses.
Very simply, the feds are doing everything in their power to take the air out of the market. And from what I’ve seen, the condo market in most big cities across the country is weak to begin with. The only reason average values keep ticking up is because people are buying expensive single family homes. Condo sales are down in most markets.
Anyway, consider this my quarterly warning. Get out of real estate. If you’re sitting on a rental that has made money, sell it. If you’re a baby boomer with lots of space and no kids at home, downsize. The writing is on the wall.