Can the New Mortgage Rules Deflate a Housing Bubble?

Posted by Canadian Dream on February 18, 2010

I suspect most of you would have already hear that the government FINALLY got off  its butt and introduced some new rules to help rein in the housing market.  In summary the new rules are:

1. Applications for a variable rate mortgage will also have their affordability tested at the 5 year fixed rate to ensure people can handle a rate increase.
2. When refinancing you can take out up to 90% of your home’s value down from 95%.
3. When buying investment property (non-owner occupied) you now need a 20% down payment to get mortgage insurance instead of the previous 5%.

All rules take effect on April 19, 2010.  So are any of these actually going to help?  Well the fact that the deadline is down the road will push through a hell of a short term surge in buying so if you don’t absolutely need to buy a property in the next few months I would sit on the sideline and watch the bubble do it’s last surge up in prices.

Then with each rule, here are my thoughts. Rule #1 is basically forcing a practice that was done at many banks anyways.  It’s not a huge change since the vast majority of mortgages applications are for fixed rate (I can’t find the exact reference but around 70% if my memory is correct).  So it won’t do much of anything in the overall market.

Rule #2 is basically trying to prevent some US style lending where people treating their houses as ATM’s.  Given it’s only a 5% shift it won’t change things for the majority of the market.  So again I think this rule won’t have much of an affect on the market overall.

Rule #3 is the bubble killer.  This is the one designed to halt flipping of houses and speculative buying which is feeding a lot of price increases in some markets.  For serious investors with cash to burn this will only slow them down, but it should put a wet blanket over those weekend flippers that are just trying to make a quick buck.  So in some regards I like this rule since it is targeted at a problem section of the market rather than increasing the down payments for everyone.  On the other hand, it will at best shave off the top of the housing bubble, it won’t deal with some of the core problems that we are facing.

In my mind the 35 year and the previous 40 year amortization periods are the real problem.  By stringing the debt over a long period with a cheaper rate it looks affordable to a person’s cash flow, but it masks the problem that people are buying more house than they should.  So after the last surge and markets fall and interest rates rise we will see the larger affect when people go to renew their fixed rates in 4 to 5 years.  Then you will see people with more debt than home equity and facing a higher rate will look at getting out of their houses and you will likely see a further push down on home prices.

So in conclusion my thoughts are the rules will help time the deflation of the bubble, but won’t stop the longer term fall out from a deflating bubble.  It’s gong to be an interesting few years for house prices.  So what do you think of the new rules? Useful or crap?

Financial Envy

Posted by Dave on February 17, 2010

I am an impatient person.  I read approximately 30 to 40 personal finance blogs a week and a lot of the writers are further along in their financial goals then I am, and it frustrates me sometimes that I’m not there yet.  I am approximately 6 years away from paying off my mortgage.  The payments being made now amount to approximately 40% of  our net pay do not seem to be making much progress towards the final goal of being debt free.  I would love to be three years ahead of schedule now -  it seems like I’m just slogging along making minimal progress.

I know that I am making progress towards my long-term goal, but emotionally, it seems to be taking forever.  I know that comparisons are not really all that useful, but it’s hard not to do it, with a lot of my “recreational” reading focusing on personal finance.  Reading stories about how Tim doesn’t need his day job anymore and how Jacob at Early Retirement Extreme is spending most of his days in his early 30s sailing it’s frustrating to know I am about 7-10 years away from even thinking about these goals, let alone achieving

I have a couple of options to speed up my plan, including:

1. Getting a higher paying job.
2. Further reducing spending.

I don’t really want a different job, and I have a feeling that if I were to earn more, my dollar per hour would probably stay close to the same (I would have to work more hours).  I think my quality of life would be reduced working more and in the end it would really only reduce my time to retirement by maybe a year or so.

As to further reducing spending, there’s not much more I could reduce.  As you can see from this post my budget is pretty tight as it stands, and there is really not much more that could be removed.  Unless I can come up with a pretty good argument, I think there may be a revolt from my spouse as I have been told that the way we are doing things is not “normal”.  I don’t think for example, we could spend less on food without having to give up some of the fresh food and nutrients that are important to us.

With neither of these options entirely attractive, I think that I basically have to be patient and allow the plan I have set up to (hopefully) come to fruition.

Do any of you have “Finance Envy”?  Do you wish you could be further ahead towards your goals then you are currently?  How do you keep your end goal in mind when it’s 15 years away?

**On another note – GO CANADA GO !!**(The Olympics have been on this long weekend at our house about 16 hours a day).

Breakdown in Time/Space

Posted by Canadian Dream on

Ugh, my long weekend here was so good I got my days of the week mixed up.  I thought yesterday was Monday, rather than Tuesday when Dave’s post should be up.  Sorry for the breakdown in time/space in my head.  I’ll put up Dave’s post today.  -Tim