In 60 days, new mortgage insurance rules will eliminate this option and also make it more difficult to access home equity. The reason behind these changes is to cool debt accumulation, which will become more costly as interest rates rise; however, preparing for the economic future likely implies paying some economic costs today.
Cooling the economy
There are two channels through which changes in the real-estate market directly influence the economy: 1) new housing starts/renovations; and 2) the service industries that support sales, i.e. realtors, lawyers and financial institutions, engineering and architectural services. There are also two indirect channels: 1) income generated from these activities finds its way into other areas of the economy, such as retail sales and government revenues; and 2) consumers tend to spend more/save less as the equity in their homes rises.
Just how much money does the sector generate? As of 2009 a total of $12 billion dollars was spent by real-estate developers on residential properties in Alberta. That's just shy of five per cent of provincial GDP, down from its peak of 6.3 per cent recorded in 2007. As for services, in 2008 real estate agent offices in Alberta generated $1.8 billion in revenues versus $1.2 billion in expenses and, although it's not possible to discern how much revenue banks and law firms generated from housing it's a substantial amount. Conservatively, we can put the direct contribution of real estate at around 7.5 per cent of the provincial economy. When the indirect spending is included, that figure is likely boosted into the double-digits.
How the shorter-amortization requirements impact the housing market will depend on how the first-time homebuyer responds to the changes, as they were by far the most likely to take out 35 year mortgages. According to a recent report by Royal Lepage on first-time homebuyers, they represent approximately 30 per cent of home sales in Alberta. New construction tends to be out of range, as are detached bungalows, meaning these buyers look more at the resale market and the condo market in particular.
Some potential new buyers will simply not be able to qualify under the shorter amortization periods, but a bigger concern might be in regards to how these households perceive the benefits of owning versus renting. Shorter amortization periods save purchasers money in the long-run (pay less interest), but often it's the monthly outlays that are at the forefront of people's purchasing decisions. The hundred dollar monthly difference now makes renting appear cheaper, especially in an era of increasing rental incentives and declining rents. All told, it wouldn't be surprising to see sales decline slightly.
With the exception of some condo-buildings, investment in new home construction is not targeted at the first-time homebuyer. As individuals build equity they move up the property ladder and it's here where new homes are absorbed. Even if prices soften, builders might not put away their hammers as the profits might still outweigh the risks associated with not moving housing units in a timely fashion.
Households less than prudent
A lot of research shows that home-equity loans were replacing other sources of lending, such as private car loans and credit cards, as it was a lower source of funds. Low interest rates, combined with rising resale values, made this an even better deal and it's clear that many households were less than prudent. As the rule changes won't impact home equity lines of credit (HELOC) already in place, hopefully any major contraction in spending will be avoided.
Whether we're not saving enough for retirement, using the HELOC to pay for that vacation or just procrastinating, there's something very human about wanting what we want now. The new rules laid out by the government will simply take that choice away for those most at risk and, in the long-run, that's not necessarily a bad thing.
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