Dear first-time homebuyer: Ottawa wants you to tread carefully



Your government is increasingly worried about you getting into the housing market, if you haven’t figured it out by now.


Ottawa has made it harder for you to get credit and is trying to limit how much debt you can take on. Has the message sunk in yet? The real estate industry says yes, and points to a dramatic drop in sales over the past few months as proof new mortgage regulations have stifled the market.


The lesson for consumers is to tread slowly.


It’s a reality check for a lot of buyers in the market for what they could realistically afford 


Gregory Klump, chief economist at the Canadian Real Estate Association, agrees there is little doubt the government has cast its eye at the first-time buyer. “They are the ones that generally take out high-ratio mortgages,” he says.


 Anyone with less than 20% saved for a down payment is considered high ratio, because under federal law they must buy mortgage default insurance if they are borrowing from a bank. Those loans are ultimately backstopped by Ottawa.


“Based on recent discussions with mortgage brokers and lenders, the way they characterize it, is that it’s a reality check for a lot of buyers in the market for what they could realistically afford,” Mr. Klump said. “Don’t buy a home with granite counter tops.”


Finance Minister Jim Flaherty was all smiles near the end of the year as sales in the sector dropped, happy with what many say has been a government-induced soft landing after he moved in July to tighten mortgage lending rules for a fourth time in three years.


“Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust,” he said. “The housing market has softened somewhat in part because of steps that I’ve taken and I’m happy about that.”


Among the key changes was the limit on amortization lengths, dropping them to 25 years from 30 years. Lengths were as long as 40 years during this cycle. Longer lengths lower monthly payments, allowing consumers to qualify for a larger loan but ultimately pay more interest.


Mr. Klump said the government is not telling people they shouldn’t buy but rather to tamp down their expectation. “Don’t get in over your head,” he says. “We’ve had an unprecedented period of low interest rates and, to prevent a housing market bubble, he has tightened mortgage regulations.”


He says it’s one thing to hear Mr. Flaherty, or even Bank of Governor Mark Carney, talk about debt but it’s another thing when the restrictions smack you right in the head and stop you from borrowing as much as you could have previously.


Farhaneh Haque, director of mortgage advice at TD Canada Trust, says consumers have gotten the message and have a new attitude when it comes to home buying.


We’ve set the bar higher and put a larger hurdle in front of first-time buyers


“I think they are doing a ton more research and educating themselves more on their affordability than they have in the past. You hear the horror stories of not getting approved after you’ve committed to a purchase,” said Ms. Haque. “They are not just leaving everything until the last minute. Some are even delaying their purchase to get a down payment.”


The government kept the minimum down payment required to buy a home to 5%, for anyone purchasing with mortgage default insurance. A rise in that percentage was one of the industry’s biggest worries.


Phil Soper, chief executive of Royal LePage Residential Real Estate Services, said the federal government has a very limited toolbox when it comes to affecting the housing industry — and the indebtedness of Canadians.


“They didn’t set out to target one buyer group. They simply wanted to avoid setting up a scenario where they were an accessory to a crime, if you will, by enticing the unsophisticated or younger home buyer into a large asset purchase where if interest rates rose they could not meet their obligations,” said Mr. Soper. “Their motives were noble but we’ve set the bar higher and put a larger hurdle in front of first-time buyers. But it is not insurmountable.”

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