If you have been paying attention to the news these last couple of weeks, no doubt you have seen that Finance Minister Jim Flaherty has been making some pretty big waves. I figured I would compile some of the most prominent media pieces as a background and then share some of our thoughts!
It is no secret that Minister Flaherty is concerned about a housing bubble in Canada and is trying to keep the market in line. Flaherty has brought forward concerns several times about the high household debt levels of the average Canadian. Flaherty's most recent mortgage rule changes in June of 2012 saw the reduction of amortizations on insured mortgages from 30 years to 25 years along with changes to the maximum Loan to Value on a refinance. The purpose of the changes was to cool the Canadian housing market and according to many articles in the press recently, it has done just that. However there have also been some negative impacts to the job market.
The recent controversy started a couple weeks ago when Minister Flaherty publicly criticized BMO for cutting its 5 year fixed rate to 2.99%. Having already made significant rule changes to cool the market, Flaherty decided to try a new tactic to keep household debt levels in check, talking with the banks. I thought Michael Bard wrote a fair article for the Globe And Mail called, Relax, BMO's 2.99% mortgage won't spark a housing crisis. Regardless, Minister Flaherty has been heard several times making statements like this one:
"As I said before, we encourage prudent lending practices, we don't want a race to the bottom on mortgage rates by our financial institutions".
So when Manulife Financial decided to compete with BMO's 2.99% 5 yr fixed with a 2.89% rate of their own, Minister Flaherty had someone from his office call and have them reconsider offering the lower rate. This resulted in Manulife pulling the rate special, much to the chagrin of financial pundits. Over the last week, many people have chimed in making strong statements like "Jim Flaherty needs to stay out of the affairs of rates" and "Flaherty Pulling the Wrong lever". Even the Americans are taking note of this and did a piece called "If Canadian Mortgage Providers Can't Compete on Price, What's Left?".
"A democratically elected Finance Minister in a free market economy has NO business telling ANY private business how to set it's pricing when they're doing it legally". - Gord McCallum
The way I see it, the questions we have to ask ourselves is... If Minster Flaherty is serious about making sure the Canadian housing market and household spending levels remain in check (everything points to this as true), and Canadian Lending Institutions continue to play the rate game and race to the bottom, what will Minster Flaherty do? What about changing the qualification of the 5 yr fixed rate from contract rate, to the posted rate?
Qualifying at the Posted Rate
Currently, to qualify for an insured mortgage with a variable rate or a fixed rate with a term lower than 5 years, you have to qualify using the 5 yr. posted rate. The posted rate is currently 5.14%. For fixed terms 5 years or longer, insured qualifications state you can use the contract rate (the rate you actually get). At First Foundation, we can currently secure financing at 2.89% on a 5 yr fixed, and actually qualify your mortgage at that rate. By changing all mortgage qualification to a posted rate, Minister Flaherty could control how much debt Canadians could take on, without affecting the rate clients actually receive and without interfering with private business in the free market economy.
Simple Math (With Terrible Results)
Lets do some simple math here: with an income of $70k, and an 8% debt load - qualifying at the current 5 yr fixed rate of 2.89% on a 25 year amortization with a 5% downpayment, you would qualify to purchase a house around $350k. If we keep everything the same but qualify you with the posted rate of 5.39%, your buying power is reduced by $70k - leaving you looking at properties around $280k instead.
So although I agree with Gord here on principle, and believe that Minister Flaherty has stepped across a line, I wonder if this isn't better than what he could do? Why not a bold quote of my own...
"I would rather the Finance Minister make "suggestions" to private businesses than take a hard line and institute further rule changes that could devastate the housing market ". - Jackson Middleton
With that said, lets look on the bright side, although Minister Flaherty is making some waves, it could actually be a whole lot worse!