Analyzing years of mortgage rule impact

The most recent mortgage rule changes have had a much smaller impact on the market than previous policy changes and there’s a simple explanation for that, according to a new report.

The most recent mortgage rule changes have had a much smaller impact on the market than previous policy changes and there’s a simple explanation for that, according to a new report.

There has been an unprecedented number of housing policy changes over the past year-and-a-half, according to TD Bank, and each has been aimed at tempering housing demand.

And while the industry viewed the last round of changes as particularly invasive, they have proven less impactful than previous iterations.

“Each successive regulation change at the federal level has left a smaller mark on home buying activity. Our estimates suggest that the most recent federal rule changes may have only shaved 2% off demand nationwide,” TD Economists Beata Caranci and Diana Petramala, wrote in their latest report, Canadian Regional Housing Outlook Navigating a Soft Landing. “In contrast, the first regulatory changes implemented in 2008 dampened home sales by roughly 10%. That policy increased the required down payment from 0% to 5% for insured borrowers and lowered the allowable amortization period from 40 years to 35 years.”

The reason for dwindling influence, according to the economists, is that each round of mortgage rule changes has specifically targeted borrowers who require mortgage insurance.

“This incented a shift away from high loan-to-value mortgages into conventional mortgages,” the economists wrote. “New loans that require homebuyer’s insurance now account for less than 20% of all new chartered bank mortgage originations, compared to 40% prior to 2008. So, each round of policy changes has targeted a shrinking share of the overall market.”

The Bank of Canada claims insured mortgage originations fell 43% in 2016 and early 2017 from the peak in late 2015.

However, that shrinking share was up by a growing number of Canadians relying on conventional mortgages.

Looking forward, it seems federal policymakers aren’t quite finished with their market tinkering.

The Office of the Superintendent of Financial Services (OSFI) has proposed additional rules in the form of income tests for all borrowers at a rate of 2% higher than the contracted rate.

And that policy is expected to temper housing demand even further.

“ … if the new measures are put into place, which will cause buyers in the former group to adjust their behaviour by coming up with a bigger down payment, opting for a lower priced purchase, scaling back other debt, or delaying a home purchase altogether,” the economists wrote. “In the year of implementation, we estimate that this new rule could depress demand by 5% to 10%, and shave 2% to 4% off of our current forecast for the average price level in 2018. This will be yet another force limiting price growth in the future.”

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Why we shouldn’t worry about debt-to-income record

One big bank is arguing the debt-to-income ratio is the most “useless economic indicator out there.”

167.3%.

You’ll read a lot about these two numbers in the coming days. That’s the debt to income ratio for all Canadians and it just hit a new high in Q4 of last year.

It’ll be whipped out when arguing against mortgage debt and for policies aimed at safeguarding Canadians from taking on even more debt.

But it isn’t that simple, according to Benjamin Tal, chief economist with CIBC. And the ratio isn’t even that useful.

“The attractiveness of the ratio is that it’s simple —one number catches all. But as we all know, the cost of simplicity is, at times, very high. The ratio compares the stock of debt to the flow of income,” Tal wrote in response to the release of the figure. “You are not required to pay off your mortgage in one year, so on that ground, that approach is faulty.

“It’s also the debt of people with debt, relative to the income of people with and without debt. Again a suboptimal comparison. And if foreign income plays a role in the housing market (and it does) that income is not part of the calculation.”

Still, news organizations jumped on it.

“Canadian households owed $2 trillion at the end of 2016,” the CBC proclaimed.

“Debt-to-income hits fresh record,” Reuters said.

But while debt-to-income levels seem frightening, CIBC argues it’s anything but.

“In many ways this ratio is designed to rise. In the past 25 years, the debt-to-income ratio fell only twice,” Tal wrote. “In a normally functioning economy, debt will rise faster than income.

“For the ratio to fall notably you need a significant shock such as the US financial crisis which led to the US debt-to-income ratio falling from over 160% to 140%,” he continued. “Is the ratio rising too fast? Not really. Total real household debt is now rising by just over 4% (year-over-year)—a rate that is in line with the performance seen during the jobless recovery of the 1990s.”

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

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The Easy Way to Create a Real Estate Empire (and … – Fool Canada

Many Canadians are attracted to the world of real estate.

There are countless stories of savvy investors who, after a few decades of hard work, now live on the rent generated by a nice portfolio of investment properties. These investors have ridden the bull market in virtually every Canadian market to handsome price gains as well.

Many investors who want to duplicate this path to wealth are out buying rental properties as we speak. But unfortunately, it’s unlikely they’ll see the level of success as the last generation did. Cap rates are much lower than before–a consequence of low interest rates–and it’s unlikely they’ll see the kind of capital appreciation enjoyed by their parents.

There’s a better solution. It offers the potential for better returns going forward, and investors don’t have to worry about any of the day-to-day operations.

Leverage REITs

You can probably tell where I’m going with this. I’m convinced Canada’s largest REITs are a better choice than a traditional rental property for many reasons. Often, the distributions are taxed at a better rate than straight rent received from a rental property. You get the benefit of professional management at a great price because of economies of scale. And REITs give retail investors access to areas of the market they normally wouldn’t be able to participate in, like commercial or industrial property.

There’s one advantage to buying physical rental property over REITs though, and that’s the ability to leverage. It’s possible–although usually not recommended–for an investor to purchase a rental for just 5% down. That kind of debt can lead to a succulent return on the original invested capital if done right, but it also adds significant risk. If underlying property values fall 5%, it would represent a 100% loss on the original investment.

It’s for this reason why most real estate investors put down 20%. That amount allows them to avoid expensive mortgage default insurance, and it builds in a little margin of safety. It’s still enough leverage that investors can capture the positive aspects of borrowing as well.

Investors can use leverage to buy REITs, and pretty easily, too. Most Canadian REITs are eligible for what brokers call reduced margin, which means you only have to maintain 30% of the stock price as equity in your account.

An investor could then supplement that by borrowing outside of their account. Say you had $50,000 in cash and the ability to borrow another $50,000 via a home equity line of credit for 3% annually. You could then take that $100,000 and easily use it to buy $200,000 worth of REITs. At a 50% debt-to-equity ratio, you wouldn’t have to worry so much about margin calls either. And depending on your broker, the cost to borrow could be as low as prime.

Of course, there’s a big risk factor. If the value of the underlying REITs falls significantly, you’ll either be forced to come up with more cash or sell at a loss.

An example

Let’s look at a real-life example of how an investor could do this using two of Canada’s largest REITs, H&R Real Estate Investment Trust (TSX:HR.UN) and RioCan Real Estate Investment Trust (TSX:REI.UN). H&R yields 6.9%, while RioCan pays 5.6%. Assuming equal amounts of the two, an investor would be looking at a 6.25% yield.

On a $200,000 investment (with $150,000 borrowed at an average rate of 3%), an investor would collect $12,500 per year in dividends, while paying out $4,500 in interest. Unlike with physical real estate, there are no other expenses. Gross profit would be $7,000, while net profit would be $7,000 minus taxes.

That’s a very attractive 14% return on the original $50,000 investment.

I picked H&R and RioCan because they’re two of the more solid REITs out there. Both have good management teams, diverse portfolios, reasonable balance sheets, and attractive payout ratios. If an investor wanted to take on more risk, there are others out there that could easily bump the total yield for the portfolio up to 8%.

And the best part? If you buy REITs, you’ll never have to fix a toilet again. Nice potential returns with no work? Sounds good to me.

Like REITs? Then you can’t afford to miss this!

We’d all love to have a steady stream of extra income, but who wants the hassle (and expense!) of buying and managing property and dealing with tenants? We have a much better option: real estate investment trusts (REITs) allow investors like us to purchase shares in a diversified portfolio of properties and earn a share of the profits!

Want to know more? Our just-released report, “Earn $6,000 Per Year in Rental Income Without Becoming a Landlord” has all the details. Just click here now to find out how to get your FREE copy today!

Fool contributor Nelson Smith owns shares of H&R Real Estate Investment Trust.

Many Canadians are attracted to the world of real estate.

There are countless stories of savvy investors who, after a few decades of hard work, now live on the rent generated by a nice portfolio of investment properties. These investors have ridden the bull market in virtually every Canadian market to handsome price gains as well.

Many investors who want to duplicate this path to wealth are out buying rental properties as we speak. But unfortunately, it’s unlikely they’ll see the level of success as the last generation did. Cap rates are much lower than before–a consequence of low interest rates–and…

Read more