Can the New Mortgage Rules Deflate a Housing Bubble?

I suspect most of you would have already hear that the government FINALLY got off  its butt and introduced some new rules to help rein in the housing market.  In summary the new rules are:

  1. Applications for a variable rate mortgage will also have their affordability tested at the 5 year fixed rate to ensure people can handle a rate increase.
  2. When refinancing you can take out up to 90% of your home’s value down from 95%.
  3. When buying investment property (non-owner occupied) you now need a 20% down payment to get mortgage insurance instead of the previous 5%.

All rules take effect on April 19, 2010.  So are any of these actually going to help?  Well the fact that the deadline is down the road will push through a hell of a short term surge in buying so if you don’t absolutely need to buy a property in the next few months I would sit on the sideline and watch the bubble do it’s last surge up in prices.

Then with each rule, here are my thoughts. Rule #1 is basically forcing a practice that was done at many banks anyways.  It’s not a huge change since the vast majority of mortgages applications are for fixed rate (I can’t find the exact reference but around 70% if my memory is correct).  So it won’t do much of anything in the overall market.

Rule #2 is basically trying to prevent some US style lending where people treating their houses as ATM’s.  Given it’s only a 5% shift it won’t change things for the majority of the market.  So again I think this rule won’t have much of an affect on the market overall.

Rule #3 is the bubble killer.  This is the one designed to halt flipping of houses and speculative buying which is feeding a lot of price increases in some markets.  For serious investors with cash to burn this will only slow them down, but it should put a wet blanket over those weekend flippers that are just trying to make a quick buck.  So in some regards I like this rule since it is targeted at a problem section of the market rather than increasing the down payments for everyone.  On the other hand, it will at best shave off the top of the housing bubble, it won’t deal with some of the core problems that we are facing.

In my mind the 35 year and the previous 40 year amortization periods are the real problem.  By stringing the debt over a long period with a cheaper rate it looks affordable to a person’s cash flow, but it masks the problem that people are buying more house than they should.  So after the last surge and markets fall and interest rates rise we will see the larger affect when people go to renew their fixed rates in 4 to 5 years.  Then you will see people with more debt than home equity and facing a higher rate will look at getting out of their houses and you will likely see a further push down on home prices.

So in conclusion my thoughts are the rules will help time the deflation of the bubble, but won’t stop the longer term fall out from a deflating bubble.  It’s gong to be an interesting few years for house prices.  So what do you think of the new rules? Useful or crap?

6 thoughts on “Can the New Mortgage Rules Deflate a Housing Bubble?”

  1. I think they should help a little, but you can’t fix stupid. I think 35 year amortization is dumb, but I don’t think we should force people to make intelligent decision. Only stop them from being a burden on the rest of us.

    Due to the CMHC buying more mortgage-backed securities, I’m not sure the banks were actually ensuring people could afford the payments. Also, for some stupid reason people get variable when rates are low and then switch when they go up. Even though almost every time you end up ahead with variable.

    I think overall it’s a good change. Too stringent of a change too quickly would have catastrophic effects on the market I think. So regardless I think it has to be done in small steps.

  2. Personally, I think it’s hard to say. Minister Flaherty has also hinted that more changes could come down the pipeline if need be.

    I think the new regs will spark some to fast-track some purchases, particularly business people having real estate plans for rental properties. We could see a spike leading up to the spring before the April deadline.

    The Rat

  3. I think it is a positive step. Going back to what worked well before. Perhaps a little late.

    An investor with a good credit rating can still buy a home for little down by using a personal loan to finance a portion of the 20 % down payment. But I guess the new rule may keep the more risky guys from getting such a loan.

  4. Another thing I just found out is that for the Total Debt Ratio only 50% of the gross rent can be used to reduce this. This is down from the current 80%. This I think will have the biggest impact on investors.

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