There are a lot of talks this week on the radio, TV and around
water coolers about changes to CMHC insurance rules. But is it really that
dramatic? Let’s take a look at how this can affect your real estate business.
First change is reduction of amortization from 30 years to 25
years on mortgages with less than 20% down. This change has probably the most effect on the market.
On a $400 000 house this means about $200 in extra payments every month.
Also to qualify you will need about $6 000-$6 500 more income. Because
for most of people it is hard to increase their income allover sudden it is more
likely that they will start looking in the lower price range. The change means
that you can afford about $22
000 less on the house price.
Does that mean prices will go down? Maybe, maybe not. In the
last few years we had sellers’ market with more buyers than houses for sale.
This resulted in multiple offers and bidding wars. Now fewer buyers can afford
an average home and it is natural to expect fewer offers, longer time on the
market and less houses sold over asking price. But will the prices go down or not
will depend on how many people were buying “on the age”. In my personal opinion
we will see a temporary slowdown with low or no price increase. Most likely it
will last till next spring, when market is traditionally more active. Next
year, after people get used to new rules, price increases will go back to
normal (whatever is normal these days). Remember this is not a first time amortization was reduced to 25 years. In early 2000s same happened with almost no effect on the prices.
All that assuming there will be no other changes. Though there is
no sign at the moment, but fewer buyers on the market means less customers for
the banks. It is possible that banks will offer new “specials” to offset higher
payments and attract clients. Keep in mind that CMHC is not the only mortgage
insurance company; some financial institutions (like credit unions, for
example) can have their own rules on what and how needs to be insured. So keep
an eye on this.
The other 2 changes (Homes priced over $1 million are no longer
eligible for CMHC insurance and MAX refinance has been reduced to 80%)
will not have a lot effect on the market. Until average house price gets closer
to a million, only minor portion of population is affected, not enough to have
major impact. As to refinancing, most of institutions allowed only 80% LTV even
before the change.
So is there a way to protect your business even if the market is
deeping? Rent-to-own strategy would be one way. The beauty of it is that the sale
price is fixed in the beginning (when you buy property) and doesn’t change with
the market fluctuations. And if tenant decides not to buy, you always keep your
option consideration. We played with numbers ones and for RTO deal to start
breaking even (if it’s done right) market needs to go down more than 20%!
