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Why squeezing first-time home buyers is a smart housing policy

If some aspiring home buyers have to be turned away to protect the solidity of the country's real estate market, then so be it.

A broad swath of the economy that makes its living from selling real estate has criticized new mortgage-lending rules because they make it harder for rookie buyers to afford a house. But responsibly managing the housing market so we adjust smoothly to rising interest rates takes precedence over helping the most people possible buy homes.

Buying a cheaper house or having to save a bigger down payment isn't half the tragedy of people buying homes they can't manage when rates rise. Banks get weaker if that happens and housing prices could fall. The years ahead would be a most inopportune time for baby boomers to lose equity in their homes.

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Starting next Jan. 1, people with home down payments of 20 per cent or more will have to qualify for a mortgage at the greater of the five-year benchmark rate published by the Bank of Canada or the original contractual rate,plus two percentage points.

The new rules bring this class of buyer more into line with requirements for people who have a down payment of less than 20 per cent and thus need to pay for mortgage-default insurance. Industry figures show that just about 40 per cent of first-time buyers over the past three years had a down payment of less than 20 per cent.

The concern in real estate circles is that some home buyers will be priced out of the market if stress-testing is extended to people with a down payment of 20 per cent or more. But these would be people who don't have the financial resources to afford higher mortgage rates.

"The prudent borrower is still going to be able to buy a house under these guidelines," said Bruce Joseph, a mortgage broker with the Anthem Mortgage Group in Barrie, Ont., who has consulted for global hedge funds on the Canadian housing market. "I don't think [regulators] have stomped on the market, although that seems to be the consensus."

In devising stress tests for home buyers, the Office of the Superintendent of Financial Institutions is saying that you have to be able to afford a house at mortgage rates that are roughly two percentage points higher than they are today. Arguably, that's a bit overzealous.

Improving economic growth has caused rates for mortgages and other types of borrowing to rise since the summer. But analysts aren't sure if there's enough momentum to keep rates moving higher in the near term. Longer term, there's a view that we're living in a slower-growth world that won't require high rates to quiet inflation.

OSFI's job is to make sure the banking system stays healthy, not help young home buyers get into the market. This is the federal agency that helped keep Canadian banks steady during the global financial crisis when counterparts around the globe were unravelling. If OSFI says a two-percentage-point cushion is needed, then we give it the benefit of the doubt.

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To illustrate the impact of the new stress test, the website RateSupermarket.ca used the example of a family with annual income of $100,000. The family can now afford a house that costs $726,939 based on a five-year fixed-rate mortgage of 2.83 per cent, a 20 per cent down payment and a 25-year amortization. The new rules would let them afford a house costing $570,970.

We get fewer, but better, home buyers using the new stress test – people who can afford their homes now, with a cushion that can be used in the near term for saving. If rates rise later, the cushion absorbs the blow.

There are economic forecasts that say the new mortgage measures will slow the housing market and, in turn, the economy. If that's the cost of weeding out people who can't afford a mortgage-rate hike, then we Canadians take the pain. Anyway, falling house prices are good news for anyone worried about whether young people can afford to get into the housing market.

"Affordability is an issue," Mr. Joseph said. "But falling home prices bring back home affordability."

Drawing Conclusions: Will you save money by locking in your variable-rate mortgage?
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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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