What effect will new changes CMHC rules have?

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%!