There is no such thing as immaculate home-buying, so let’s welcome the new mortgage rules

The spring 2025 housing market promises to be quite the spectacle.

New mortgage rules aimed at improving affordability for first-time buyers take effect Dec. 15. By the time spring arrives, the combination of low mortgage rates and easier-to-carry mortgages could well revive the market.

The rest is a yadda yadda of hot real estate markets – rising prices, bidding wars, a growing number of cities with average prices at or near $1-million and migrations out of expensive locales to smaller communities. Bad on the federal government for easing mortgage affordability rules, right?

Wrong. We currently have a mortgage market governed by rules made in the calmer, cheaper days of 10 to 20 years ago. The changes announced by the government on Monday are a much-needed modernization that better matches buyers with market conditions.

The new rules are for people with down payments of less than 20 per cent,

which means they require mortgage default insurance. These buyers will soon be able to get an insured mortgage on a house that costs $1.5-million, up from $1-million, and they can stretch their amortization to 30 years from 25. Currently, there are limits on the availability of 30-year mortgages.

The ideal time to introduce these changes would be in a sharp housing market downturn where buyers are rooted on the sidelines. Easing affordability for first-time buyers with smallish down payments would be welcomed all around in that environment as a kind of economic defibrillator.

We’re nowhere near crash conditions today, but housing is eerily calm if you judge by the standards of the past four years.

The Canadian Real Estate Association reported Monday that average resale prices nationally were flat in August compared with the same month last year, while sales were 2.1 per cent lower. How refreshingly boring, if you value a rational market that reflects the underlying economic conditions.

Some economists believe housing will pick up as a result of declining interest rates, which on their own help ease affordability for both buyers and people renewing mortgages. But the underlying economic fundamentals don’t equate with a strong housing market.

In the mortgage business, economists view employment as a key indicator of health in the real estate market. The national unemployment rate has in the past 12 months gone from 5.5 per cent to 6.6 per cent, the highest level since May, 2017, if you exclude the pandemic.

Waiting for further deterioration in housing to ease mortgage rules makes sense, but there’s a growing sense of alienation among young people over their place in the economy. Making it easier to afford a mortgage addresses this in a much more direct way than plans to get more houses built. Also, it has to be noted that these mortgage changes were introduced by an unpopular minority government that could face an election at any time.

Mortgage amortizations of 30, 35 and even 40 years were made available in 2006, but they overstimulated the market and had to be largely rolled back. What’s different today is that the average resale housing price is much higher – $649,096 in August, compared with $276,501 in 2006. The average August price in Toronto was $1.1-million, compared with $352,388 in 2006.

Another argument for 30-year mortgages is the likely financial life path of today’s young people. The 25-year mortgage seems logical for a population where retirement happens by 65 and you live until 75 or 80. But it likely will be normal for Gen Zs to work until their late 60s and live into their 90s.

We have to acknowledge that longer amortizations and a higher ceiling on homes bought with insured mortgages are non-optimal from a personal finance standpoint. In choosing a longer amortization period, you make lower monthly payments for a longer period of time. The cost is a higher total interest bill over the life of the mortgage.

But immaculate home buying doesn’t exist in 2024 Canada. If we keep the rules as they are, people end up with mortgages that require huge down payments and produce crushing monthly payments. If we ease mortgage insurance rules, we end up with people paying more interest for longer, and we potentially heat up the real estate market.

Whatever way we go, it’s financially messy to assemble a down payment and carry a mortgage plus other housing costs. 

Keep a close eye on property taxes – they could be our next affordability problem.

By Rob Carrick Sept. 17, 2024