- Created on Thursday, 13 March 2014 00:21
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By NICK FEARNS
The cost of buying a house without a 20 per cent downpayment will be just a little bit higher starting May 1.
The Canadian Mortgage and Housing Corporation (CMHC) announced it will increase premiums for its mortgage loan insurance for homeowners and one- to four-unit rental properties.
“The higher premiums reflect CMHC’s higher capital targets,” says Steven Mennill, CMHC’s vice-president, Insurance Operations. “CMHC’s capital holdings reduce Canadian taxpayers’ exposure to the housing market and contribute to the long term stability of the financial system.”
The average increase in premiums will “result in an increase of approximately $5 to their monthly mortgage payment.”
The CMHC provides mortgage insurance to allow potential homeowners to put down less than 20 per cent of the purchasing cost. Mortgage insurance protects lenders from a mortgage default.
Ronald Balvers, Michael Lee-Chin & Family chair in Investment and Portfolio Management at McMaster University’s DeGroote School of Business, in Hamilton, Ont., says this change is unlikely to slow Canada’s hot housing market.
“In principal, it could really slow things down. But I think when you look at the implications for homeowners, it’s going to be relatively minor,” he says. “It will stop some people, but not many.”
“Right now first-time homeowners are being subsidized and it is a nice way to encourage home ownership. However there is also a cost; there is a contingent liability for the government, and so one way of helping the government, at least in the long run, to help balance the budget, is to better capitalize this mortgage institution.”
Canada’s housing market has regularly been a topic of concern with Germany’s Deutsche Bank which called Canada’s housing market the most overvalued among 20 developed countries.
Deutsche Banks report found in Canada, the ratio of prices to rent is 88 per cent above the historical average and 32 per cent above prices to income.
“I think part of this is when you have a resource economy, where there’s relatively a lot of wealth, that tends to push housing prices up, so it’s not surprising that housing prices are high,” says Balvers. “On the other hand, certain areas had prices that were not as overvalued, like the United States or Spain, where there was a big correction, so I wouldn’t be surprised if it happens.”
Stephen Poloz, governor of the Bank of Canada, testified before the Senate banking committee saying, “Our judgment is (the housing market) is a situation that is improving, this is not a bubble that exists here that would have to be corrected.”
Poloz said there was a 60 to 80 per cent chance of a “soft landing scenario” for Canadian housing prices.
If Canadian housing prices drop, the CMHC will step in to protect lenders and stop taxpayers from having to foot what could be a billion-dollar tax bill.