Rob Carrick: Why homeowners should cheer new down payment rules

A sustainable housing market is better than a hot housing market.

So a tougher standard for house down payments is good for both first-time buyers and the baby boomers who define their wealth in terms of how much their houses have risen in value. The new down-payment rule is a mere tap on the brakes, but a welcome one in that it addresses the hottest markets while leaving the others alone for the most part.

The new rule applies only to people who have a down payment of less than 20 per cent and thus require mortgage default insurance. Starting Feb. 15, the minimum down payment will rise to 10 per cent from the current 5 five per cent for the portion of a house price that exceeds $500,000. If you already have a mortgage or apply for mortgage insurance before the start date, you won't be affected.

The impact of the higher down-payment requirement will be quite limited across the country. Data on major cities from the Canadian Real Estate Association show that only Vancouver, Victoria and Toronto have average prices above $500,000. Other cities may have premium homes above this level, but they would appeal to buyers able to come up with higher down payments either themselves or with parental money.

In dollar terms, the minimum down payment for a $700,000 home would rise to $45,000 from $35,000. That's $25,000 (5 per cent) on the first $500,000, and $20,000 (10 per cent) on the other $200,000 in price. The blended down payment for the entire mortgage works out to 6.4 per cent. Note that the rules apply to mortgages up to $1-million in price. After that, the minimum down payment of 20 per cent remains.

Our national narrative on housing is that everyone should own, and that obstacles to people buying a first home should be removed as much as possible. From that point of view, the higher down-payment requirement is a negative. Some new buyers in Toronto and Vancouver will be knocked out of the market temporarily.

But that's a fair price for bringing some stability to a housing market in which prices in many cities have for years risen far in excess of incomes. Real estate people have binders full of talking points to explain why prices can keep rising in Toronto and Vancouver, but those who treat houses for what they are – a financial asset like any other – believe streaking prices raise the chance of a sharp correction.

If we cool the market a little bit, as the new down payment rule is designed to do, the risk of a pullback is at least somewhat reduced. It's hugely important for the government to get this right because so much of the nation's wealth is tied up in home equity. Boomers in particular are living in homes that have increased many times in value. A big decline in house prices would be a shocking setback to these people and could negatively affect their financial health in retirement.

Mild as it is, the new down-payment rule could only momentarily slow hot markets. But at least the new Liberal government has shown that it's monitoring housing and ready to act to keep it in line. For homeowners, that's far better news than another month of big price gains.