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Montreal housing for sale. (Christinne Muschi/Christinne Muschi)
Montreal housing for sale. (Christinne Muschi/Christinne Muschi)

CREA urges caution over more mortgage rule changes Add to ...

The Canadian Real Estate Association has cautioned the federal government to stay out of the mortgage market until the effects of recent changes can be gauged, as it suggested buyers are racing to secure 35-year mortgages before they are banned in late March.

The federal government recently announced the end of insurable 35-year mortgages, leaving new buyers to take on amortization periods of 30 years or less. The move was made to help lower household debt in Canada, and makes it more expensive on a monthly basis to own a home.

The changes have yet to come into effect; the government gave the industry 60 days to adapt after making the announcement in mid-January. That has given buyers a chance to secure longer mortgages ahead of the changes, CREA suggested, noting January sales increased by 4.5 per cent over December but were down 6.6 per cent compared to January, 2010.

"It will take some time before the longer-term impact of the latest mortgage regulations on the housing market can be known," CREA president George Pahud said. "For that reason, further action shouldn't be taken until the impact can be measured."

Market watchers have expressed varying degrees of concern over the amortization changes, with some suggesting it will have a minimal effect even as it pushes some first-time buyers out of the market, and others suggesting price drops of up to 10 per cent as the market adjusts.

Finance Minister Jim Flaherty acknowledged the changes - which also included a reduction in the amount of equity homeowners could access to refinance their homes to 85 per cent of the property's value - will be difficult to gauge.

"This is not arithmetically predictable, precisely," Mr. Flaherty said when he made the changes. "We expect some moderation in the market. We're taking these steps in any event now because of our concern about higher interest rates down the road."

Rising interest rates are a deeper threat to the market, according to economists, because they would make monthly mortgage payments more expensive and push some Canadians - who took on too much cheap debt - out of their homes.

Still, CREA and Royal Bank have both raised their forecasts for the next two years suggesting that a balance between new listings and demand will temper any big moves in the broader market in either direction and that an improving economy will help Canadians service their loans.

Not everyone sees such a rosy picture. Capital Economics recently issued a cautious report suggesting higher interest rates could drive home prices down as much as 25 per cent over the next three years.

CREA said Tuesday the national average price in January was $343,675, little changed from the previous three months (the average price in December was $344,551). Resale listings more than doubled from December, however, and on a seasonally adjusted basis new listings rose 3.9 per cent for the largest monthly gain since March 2010.

There are still relatively few houses for sale, however, with the seasonally adjusted months of inventory - the amount of time it would take to sell all of the homes at the current rate of sales - at 5.5 months. That's the lowest level since March.

"Because sales activity and new supply rose in tandem in January, the national resale housing market remained balanced. The national sales-to-new listings ratio, a measure of market balance, stood at 55.7 per cent in January, 2011, which is little changed from the previous two months," CREA stated.

Toronto-Dominion Bank economist Diana Petramala noted that a pickup in sales had been expected as buyers rush to beat new mortgage insurance rules that come into effect next month.

"The growth spurt will likely be short-lived, and come at the expense of future sales," Ms. Petramala said. "As was the case the last time the federal government made mortgage insurance rules more restrictive, the strength in sales will likely be followed by a short period of weak housing data."

Overall, she added, the housing market is still in a "well-balanced position with little price pressures on the horizon."

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