Go too far in helping people afford to buy a home and you put the whole economy at risk.
The federal Conservatives are walking this fine line with election promises made Monday to help young home buyers.
The Conservatives have an idea to improve home-buying affordability that makes some sense: If elected, they would extend the maximum amortization to 30 years from the current limit of 25 for loans with a down payment of less than 20 per cent. You can already go 30 years if you put 20 per cent down.
Alone, the move to 30-year amortizations for all would make payments more affordable on a monthly basis and sync better with our longer tenures in the work force and longer lifespans. But, apparently, this isn’t enough help for the ever-needy housing sector.
The Conservatives also said they will “fix” the mortgage stress test to ensure that first-time buyers aren’t unnecessarily blocked from getting a mortgage, and eliminate the stress test on renewals. The stress test sensibly ensures home buyers can afford higher payments if interest rates rise.
The housing sector has been complaining non-stop about the stress test since its phased introduction a few years ago. The test was first applied to mortgages with a down payment of less than 20 per cent and then extended to mortgages with larger down payments.
Removing the stress test on renewals is defensible because it would help home owners find the lowest possible rate and keep their debt as manageable as possible. Currently, people renewing a mortgage may be stuck with their current lender if unable to pass the stress test. As a captive borrower, they would likely have to pay a higher rate than they might get if they shopped around.
The stress test for first-time buyers is maybe a bit draconian in how it requires them to be able to afford a magnitude of interest-rate increase that is unlikely to happen. But from a personal finance viewpoint, it’s brilliant in how it forces people to give themselves some breathing room with their mortgage.
Ease the stress test on buyers and this margin of safety shrinks. People spend more on their homes and have less to cover other costs. They borrow to make up the difference and intensify the risk to the financial system if we get a recession where people get laid off or see their incomes fall.
There’s a history of politicians pushing things too far to help home buyers, including the 2006 introduction of 35- and 40-year amortizations and zero down payment mortgages. All three options were cancelled as regulators started to worry about the market overheating.
The federal Home Buyers’ Plan is a misguided program that has at least twice been expanded. You remove money from your retirement savings to buy a house, then repay what you took over 15 years.
In a country obsessed with home ownership, the last thing we should be doing is encouraging people to take money away from their retirement savings to buy a home. And yet, the federal Liberals pushed the withdrawal limit for the HBP to $35,000 from $25,000 in their 2019 budget.
Thirty-year amortizations for people with small down payments were made available in 2006 and then rescinded in 2012. Evan Siddall, president of the federal government agency Canada Mortgage and Housing Corp., has warned that reintroducing the 30-year option would inflate house prices, as would easing the stress tests.
The argument for making 30-year mortgages available to all buyers is that it reflects the way Canadians are working and living longer. The average life expectancy of a newborn was 82 years as of 2017, up from 75 or so in 1980. The average retirement age has steadily edged higher on an annual basis since 2008 (it was 63.8 in 2018).
A more widely available 30-year mortgage would allow more buyers into the market and probably inflate prices that have already shown signs of beginning a new leg higher in some cities. But it’s also a modernization of an archaic insistence on 25-year mortgage repayment.
There’s no such redeeming aspect to fixing the stress test on buyers. In fact, it’s the kind of move you make when you’re taking dictation from the housing industry and ignoring regulators who have the job of managing risk in the economy.
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