One day before the anniversary of Jim Flaherty’s government-insured mortgage rule adjustment, the Bank of Montreal issued a report that illustrates the impact these changes have had on first-time home buyers in Canada over the past year. The new rules — first introduced July 9th, 2012 — reduced the maximum amortization period to 25 years and lowered how much Canadians can borrow against their home equity by 5%. As a result, BMO’s report reveals that 19% of Canadian first-time home buyers have delayed their purchase plans.
The largest problem first-time home buyers face is scrounging together enough money for a downpayment, which is now around 20%. Considering first-time home buyers expect to spend an average of $300,000 on their home, downpayments could be anywhere above $48,000 (or 16%). While such a financial strain initially affected market sales negatively, many economists believe that the rule change has finished making ripples. In fact, now that the market has begun to recover, most analysts observe that Flaherty may have avoided a market crash altogether, which was one of the main reasons for adjusting the rules in the first place.
For first-time home buyers, the rules were changed to prevent Canadians from overwhelm themselves in debt. Despite such efforts, Statistics Canada’s 2013 projections suggest that the national household debt-to-disposable income ratio has elevated to 163% — a similar figure to pre-recession America in 2007. With careful inspection, however, Canadian debt levels are not as they seem. TD economist Diana Petramela noted many incomparable details between the two sets of statistics (current Canada vs. 2007 America). After making the proper adjustments, Ms. Petramela discovered that the true debt-to-disposable income level sits around 156%. The three factors taken into consideration were:
- Non-Mortgage Debt Payments — Unlike the U.S. data, Statistics Canada omitted interest payments on non-mortgage debt, meaning that such numbers needed to be added back into the total, lowering nation debt levels overall.
- Non-Profit Institutions — Statistics Canada did not include non-profit institutions in their data.
- Health Care — Canadians pay more taxes for health care, which is an enormous factor to consider.