Ceiling lifted for hig-ratio mortgage

Tuesday, September 9th, 2003

Michael Kane

Ottawa is easing restrictions for cash-strapped home buyers in a move expected to fuel continuing strength in housing markets across the country.

Canada Mortgage and Housing Corp. confirmed Monday that there will no longer be price ceilings on homes that can be bought for just five per cent down.

That means buyers in the Greater Vancouver area will no longer be restricted to homes worth $300,000 or less if they require high-ratio mortgage insurance from CMHC or GE Capital.

If the buyers earn enough to service the mortgage — and with today’s low mortgage rates, some do — they can buy more expensive homes with as little as five per cent down.

Ottawa‘s move is in response to rising housing prices and consumer concerns about unequal treatment under price ceilings which vary across the country according to local market conditions, said Cameron Muir, senior housing analyst at CMHC in Vancouver.

“It makes things much easier for buyers who may have been looking at a home a little bit over the ceiling,” he said.

“It means more of a level playing field across the country and it is also a response to our being able to monitor risk more effectively.”

CMHC now relies on a computer system to assess risk for each individual mortgage application.

Further evidence that housing demand continues to exceed supply came Monday with StatsCan figures showing that July registered the third-straight monthly gain in residential building permits.

Also fuelling housing markets is last week’s cut in the Bank of Canada lending rate, which has lowered the cost of variable mortgages pegged to the prime rate.

Economists say there could be more cuts in the coming months before rates start to rise again, probably in the latter half of 2004, and that’s likely to encourage more borrowing despite debt-to-income ratios at a record high of 103 per cent and talk of a debt timebomb set to explode if interest rates were to move up sharply.

“I would not be surprised if the debt-to-income ratio reaches 110 per cent six months from now, but the good news is that we don’t think interest rates will rise any time soon,” Benjamin Tal, senior economist at CIBC, said Monday.

“Debt-to-income is a misleading ratio because the debt-to-asset ratio is not rising, and one of the main reasons for that is the appreciation in house prices.

“That is something that is crucial. If you had a crash in the housing market then you definitely have a problem, but we don’t see that happening.”

Toronto-based Tal believes the housing market is peaking and set to stabilize.

“We won’t see any more double-digit gains, but we will stay where we are now,” he said. “It won’t crash.”

Helmut Pastrick, chief economist for the Credit Union Central of B.C., said new housing supply is beginning to increase but the supply of resale homes is down five per cent year to date.

“Market conditions here are the tightest they have been since this housing expansion began back in mid-2000,” he said. “Supply shortages and record low interest rates will continue to drive this market.”

Pastrick anticipates at least one more quarter-point rate cut by the Bank of Canada, possibly two, and expects mortgage rates to remain in their current range until 2005 or 2006.

Tal thinks the central bank will cut at least one more time, but at the minimum they will keep interest rates where they are until late 2004, which means consumers will be able to continue to borrow without too much fear.

He said rate increases down the road should not be an issue if they are gradual and in line with economic activity and employment.

Muir said low inventory levels and the absence of rampant speculation indicate that a housing bubble is unlikely.

“The renters are buying and young people are moving out of their parents’ homes and buying, so what you have is pent up demand out there,” he said.

“I think it has been unleashed by this affordability issue — you have low mortgage rates and a good outlook in terms of consumer confidence and that’s really pushing the market.”

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