March 18 2011 Department of Finance Mortgage Rule Changes and Real Estate Affordability in Vancouver

We’ve been discussing mortgages a lot lately because they have such a huge impact on Vancouver Real Estate Market.

In previous posts we explained the March 18, 2011 Mortgage changes Canada’s Department of Finance enacted.

Today we’re going to talk about how these changes to Canada’s mortgage rules will affect the affordability of residential real estate here in Vancouver.

Jessi Johnson a Vancouver Mortgage Broker did some calculations to give a better idea of the impact from these changes.

Rising Rates & Shortened Amortizations Affect Vancouver Housing Affordability?

We’ll use a relatively average property costing $500,000, quite common in the Downtown Vancouver condo market as our example.

If the High Ratio Buyer (less than a 20% down payment) has zero debt (VERY rare), they would be able to qualify for a mortgage if they made the following:

• Using a 35 year amortization with 4% interest, the High Ratio Buyer would have to make about $75,000/year. The “average family” in Canada already can’t afford to make this purchase.  The Buyer would require a co-signer or need to have above average income.

• Now let’s jump ahead when interest rates reach 5% and we can only use a 30 year amortization. Now this person or family must make about $85,000.

• How about we be more realistic and really look into the future by a few years. The property value goes up 50k to 550k, rates are now 6% and we still can only access the 30 year amortization. That same person now needs to make over $100,000 to purchase an “average” condo in Vancouver.

Jessi Johnson doesn’t embrace these new changes. He feels restrictions on credit card lending should be applied instead.

I like these measures and see it as a nasty tasting medicine. It tastes bad, but its good for you. These mortgage changes may slow the Vancouver real estate market slightly, but they will stabilize it by ensuring the credit quality of more marginal buyers when inevitably rates rise.

What Are Your Thoughts?

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