Ottawa's surprise move this week to cool mortgage lending included a notable measure targeting the high-end real estate market: homes priced above $1-million.
The new rule will bar government-backed mortgage insurance on homes above the million-dollar mark, making it harder for buyers without a hefty down payment to buy high-priced properties. Finance Minister Jim Flaherty cited concerns about overheating markets in some parts of the country, and homeowners racking up too much debt.
A close look at the numbers, however, indicates the move may have been driven more by politics and psychology than consumer protection.
Mr. Flaherty announced Thursday that insurance from the Canada Mortgage and Housing Corp. and its private sector competitors will only be available on homes worth less than $1-million starting on July 10. This means that anyone wanting to purchase a home above that price must put down at least 20 per cent to secure an uninsured mortgage.
But the move is unlikely to yank mortgage protection from under the feet of many prospective buyers, even in centres such as Toronto and Vancouver where prices have soared in the last few years.
In its most recent annual report, CMHC indicates that only 5 per cent of all the loans it insures are for amounts over $550,000 (its highest bracket). The majority of loans it insures are in the range of $100,000 and $400,000, at 71 per cent. A high-ratio loan on a $1-million home would start at $800,000.
CMHC's private sector competitor Genworth MI also notes that the average price of the homes it insures in Vancouver is $453,000 – well below the market average of $792,000.
And in Toronto, which Mr. Flaherty pointed to as one of the riskiest hot-spots, especially in the condo arena, only 5.7 per cent of the total homes sold in Toronto went for more than $1-million in the first five months of the year, according to the Toronto Real Estate Board.
So why would Mr. Flaherty go to such extremes to slap a cap on homes above $1-million?
The issue is a matter of optics, with a moral component, according to Finn Poschmann, vice-president of research at the C.D. Howe Institute. He notes that there's no major economic reason for the change, but "why should the general taxpayer be exposed to the risks associated with richer folks' housing loans?"
The message Flaherty is sending to the public is that CMHC – a Crown corporation that would essentially leave taxpayers on the hook for these big-time purchases if a buyer defaults – is not a vehicle for a more-luxurious lifestyle, but for buyers who really need the protection.
The original mandate of CMHC was to make housing affordable to Canadians, and in 1992 it wouldn't even insure properties above $250,000 in the country's most expensive markets. In some areas, that amount was as low as $125,000. "Insured mortgages are primarily aimed at people that are young and entering the real estate market in early stages of their lives. Even in Vancouver and Toronto you can certainly find accommodation for well less than [$1-million]," said Phil Soper, CEO of Royal LePage. Price ceilings were eliminated in 2003.
"This move is mitigating future risk and it's sending a political message," says Calum Ross, a Toronto-based mortgage planner with many clients in the high end of the market. "I think it will have not only a financial impact, but also a political and psychological impact on people."
Ross McCredie, founder and chief executive officer of Sotheby's International Realty Canada, agrees the rule change is more of a symbolic statement. "We still think Canadians are incredibly conservative when it comes to real estate for the most part," he said. But he does think it will cause consumers to think more carefully about the market. "What they're doing will shake people's confidence and make them say 'oh jeeze, there's a problem out there,' " he said.
Andrew Hasman, a realtor who specializes in single-family homes in Vancouver's west side, said "in my market, the average price range is $1.5- to $1.75-million and very few will have CMHC financing. The impact at the higher end will be minimal."
That's because home buyers signing on the dotted line for property in the million-and-up range usually already have equity in the market, said Richmond, B.C.-based Gord Pipkey, a 30-year veteran of the industry and one of the country's top residential brokers in mortgage volume. "On the large deals, when people are buying properties for $1-million, or $1.5-million depending on the metro area, they generally have 20-per-cent equity," he said.
And the numbers back up his claims. Even right in the sizzling Vancouver market, between 75 and 80 per cent of all purchasers buy either in cash or with substantial down payments that do not put them in the high-leverage category. Mr. Pipkey refers to these buyers as "move-ups," because he says most of them already have equity from a previous property.
But that's not to say that the government's new cap is completely without merit. It could actually lead to change in cities like Toronto and Vancouver if the price of homes keeps rising. "What we're hearing is that the number of people putting less than 20 per cent down for $1-million-plus homes is not huge, but we know what the market has been doing – particularly in Toronto – the last little while," said Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Many real estate experts say the $1-million cutoff only makes sense in Toronto and Vancouver because of these rising prices. If price points continue to climb, then the cap could take on a different meaning. "If you think about the average home already worth north of $700,000 in some places, it's not that much of a leap before the average home starts to look close to that $1-million figure," Mr. Ross said. "And so this change is mitigating future risk and sending the message that more prudence around is needed."
In some Canadian markets, Mr. Ross would even suggest the cap should be much lower. He notes that the U.S. had restrictions on the size of mortgages that Fanny Mae and Freddie Mac would cover even before the financial crisis. "It is absolutely and completely a necessary credit adjustment in the markets," he said.
Those not-so-distant memories may be part of why Ottawa believes it's so important to show Canadians that they won't be left to pick up the pieces should their high-flying neighbours, with scraped-together 5-per-cent down payments, happen to crash.