Mortgage insurance clamp-down impacts rental housing supply

Federal Finance Minister Jim Flaherty may well have created a problem he didn't have while attempting to fix a problem that didn't exist, namely speculation in the housing market.

As readers of this column would know, late last year, Flaherty began musing about slowing down the housing market by increasing the minimum five per cent down-payment and/or shortening the maximum 35 year mortgage amortization period.

Although Flaherty said he would only act if there was evidence of a housing bubble, which he did not see, he went ahead in mid-February to tinker, with one notable exception, with the mortgage insurance rules.

Thankfully, Flaherty did not increase the minimum down-payment, a move which would have hit homebuyers in relatively expensive housing markets like the GTA the hardest. It's difficult enough to scratch together five per cent of the average GTA house price -- ten per cent would have dashed the hopes of most first-time homebuyers.

Flaherty also left alone the 35-year maximum amortization period, although he did institute a rule that all borrowers must qualify at the five-year fixed mortgage rate even if they are choosing a different term with a lower rate. This minor move is prudent yet not overly harmful to homebuyers, nor is the new rule that CMHC will not insure re-financings above 90 per cent of the home's value.

Its Flaherty's move to require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for "speculation" that is concerning. The reality is that if you are putting more than 20 per cent down, you don't even need mortgage insurance but I guess it sounds better to say you are slamming the door shut and better still to do it under the guise of curbing speculation, which nobody, myself included, likes to see.

The problem with Flaherty's assault on "speculation" is that it doesn't exist. The second but related problem is that the people Flaherty labels as speculators are actually investors, without whom we would have precious little rental housing supply in the GTA.

When I think of speculation, I think of quick-flippers who take advantage of rapidly rising prices by buying and quickly re-selling units for a fast profit. When you think of all the taxes, fees, levies and commissions embedded in the price of a home, it's obvious that the transaction costs alone preclude speculative gains. 

I will be the first to admit that there are a significant percentage of investors in the GTA condo market and I will even admit that the behavior of those investors can be disconcerting.

On the other hand, given the pre-sale thresholds required by banks to finance construction, and, ironically, for CMHC to insure those construction financing loans, investors are key to getting projects off the ground in the first place.

Frankly, if not for those investors who ultimately put their units on the rental market, the vacancy rates in the GTA would be dramatically lower. Let's not forget that due to provincial rent controls and federal tax disincentives, the private sector is not building rental apartments any more.

According to a report prepared for the Canadian Home Builders' Association, the new rules "will have little or no impact on speculation but will curtail investment in rental housing by small private investors." That CHBA report has been submitted to the federal government along with a recommendation that the new requirement be given "serious reconsideration." Considering the idea was never discussed in the first place, I couldn't agree more.