There is the old cliché that goes; “We are living in interesting times”.
In general I have always supported the concept of long term ownership of real estate. Especially when you consider the benefits of having the ability to tax shelter any market gain made in value of your personal residence. As a result, in past years, home ownership became the cornerstone of wealth creation for many baby boomers and their parents. Besides the financial benefits experienced through home ownership, there have been many other indirect social and economic benefits to Canadian society as new residential neighbourhoods were established coast to coast. Meeting the shelter needs of its citizens and helping to create an orderly, stable and affordable realty market has always been a high priority for the Canadian Government. A substantial portion of our national productivity and tax revenues are derived directly from the Canadian Housing Industry. Yes, long term I would almost always agree in the logic of residential home ownership.
Some days my Crystal Ball really does not work as well as other days, however I do feel strongly that we are currently in a buyer’s market and that state will remain as long as we have a disproportionate supply of sellers to the demand of buyers. Many people who purchased real estate five years ago with modest down payments have not seen nor shared the positive experience of seeing their housing dollars grow. In fact some have seen decreases and erosion of their housing equity as a result of declines in market values. This has produced a whole generation of purchasers not being able to sell and repurchase larger homes. Historically this trend to sell and repurchase “bigger and better” shelter is commonly referred to as being a “move up market”. Without an active move up market the entire real estate market “food chain” is affected.
Once again we have seen changes to mortgage qualification rules. To lenders, realtors and purchasers alike these changes have caused some confusion. Effective July 3, 2012 the following new parameters apply to all new insured mortgages:
1. The maximum amortization period is reduced from 30 years to 25 years for insured mortgages.
2. Reduction of the limit on refinances from 85% down to 80% Loan to Value.
3. Debt Service Ratios must now not exceed 39% and Total Debt Service Ratios must not exceed 44%. These are more generous ratios than previously permitted and offset the reduction in the amortization period.
4. Lenders are required to insure that applicants for insured mortgages must have a credit score of 680 for debt service ratios above 35/42.
5. Insured mortgages are now only available on purchases with a price of less than $1 million.
Previous changes to rules regarding insured mortgages had eliminated insurance for any non-owner occupied residential property that was being purchased to be used as a rental property. The end result is that all rental properties and now also any residential property valued at over $1 million requires a down payment of at least 20%.
It is however, important to note that long term mortgage interest rates are now being offered for 10 year terms at less than 4% and are likely to remain low for the coming months. Accordingly, I would recommend that potential buyers continue to consider and focus on the long term value that home ownership offers, continue to save additional funds for a larger down payment and continue to educate themselves as to the current real estate market trends and lastly, decide if now might actually be an opportunity rather than a challenge.
As in many instances in life when you least expect to find something, you may just trip over it.
Paul E. Croy