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?

2009 Goals Report

Posted by Canadian Dream on January 21, 2010

Sorry  I’m a bit on the late on posting this report of my 2009 goals, it took me a while to figure out the math on goal #3.  In case you don’t recall my goals  I’ve reposted them in bold below.

1. Reduce my LOC balance to zero by mid-2009 (ie: June, July or Aug).  Completed by March 26, 2009.  A full two months early.
2. Max out contributions to both my wife and my TFSA’s for 2009.  Completed in April 28, 2009.
3. Make total contributions to pension (employer and mine), RRSP’s,  TFSA’s and taxable accounts of $25,000 in 2009.  Remember this includes goal #2 as well, but final total was $28,400.  So I beat that goal by about 14%.

My bonus goal should I complete the above with cash to spare is to make a extra mortgage payment (or two). Ok this one I more than made this goal.  I estimated I should have paid off about $8000 in principle off the mortgage in 2009, but we managed to pay off over $16,000.  So we paid off an extra $8000 or about 14 extra half month mortgage payments.

How the hell did we beat the bonus goal so much?  Well keep in mind I got the school board job in late 2009 which allowed me to make about half of those extra payments.  The rest came from a few extra payments and the fact we got a lower interest rate on the mortgage in the late spring so the regular payments paid down more principle than expected.

So on the money side it was a great year, but not so much on the personal goal side. My personal goal to finish a 1st draft of my book,  but I failed to complete it.  I would estimate I’m about 80% done.  So what happened?  Well it was a few items but the most significant was I changed my chapter structure about mid-way into 2009 and the resulting merging of chapters took way longer than I was thinking it would.  I also had to toss out some previous writing.  It was also just my fault that I didn’t focus enough time on this goal to get it done.  I sort of fell off my daily work on the book routine in the summer and never got back on the daily routine again which cost me by the time I took on the school board job in the fall.

Rather than just feel sorry for myself about missing the personal goal I think I’ll just keep working on the book and get it done this year.  When?  I don’t have a clue, since obviously I underestimated the amount of time I needed to finish the project in 2009.  I’ll keep you all informed when it’s close to being ready.

So how did you do for your goals in 2009?  What did you make or miss?

Housing Bubbles and You

Posted by Canadian Dream on December 30, 2009

I’ve previously discussed the concept of a potential housing bubble in Canada, but apparently that speculation is also going on in a few other places such as well such as China and some fears about the US re-inflating their housing bubble again.

Regardless of if these are real bubble or not since 2008 we have collected learned that a housing bubble can send debt shock waves around the world.  Yet what does it all mean for the average person?  Well here’s my list of some common hazards to a housing bubble.

1. Buying a House at the Peak.  This is likely the worst case event to have happen.  You get sucked into a buying a house near the peak of the market and then if the market falls you end up owning a house which has a bigger mortgage than what it is worth.  At this point that extra debt you took on at the peak can’t be gotten rid of by selling you have to eat the extra interest and principle costs.  The good news is if you don’t have to move soon you can spread out the pain over a number of years.  The bad news is you still paid too much for your house.
2. Spread Things Around.  Yes just about every world market got nailed when the US housing bubble burst, but some specific markets in the US did a lot worse for housing prices.  So the rule of diversification still applies, you don’t want all you money in a single country or even city.  Spread things around a bit especially in your real estate investments as you likely have too much money as is in your local real estate market compared to the rest of your assets.
3. It’s Better to be a Lender than a Borrower.  Owing debt sucks  since you are at the mercy of others for interest rates and getting credit.  Especially so when the credit markets start to cease up.  So keep your own borrowing to a modest level and keep a decent credit history they can come in handy when things get tough.  Also some fixed income investments is a good idea for just about everyone since bonds actually did well overall in 2008/2009 and so provided a nice hedge.  Just don’t forget point #2 above still applies to bonds as well.
4. Panic.  The top risk to you in a housing bubble collapse is very simply just one thing: you.  So regardless of how bad things are looking remember to NOT PANIC.  The trick to avoiding panic is having a plan and sticking to it or even selectively ignoring the news for a few weeks.

So that’s the obvious hazards I see in housing bubbles.  As you might have noticed there isn’t a lot of difference to them to most other risks to your financial health.  What else would you add to that list?