It’s a lot harder to afford a home than it used to be, but Canadians still overwhelmingly want to be homeowners.
Three out of four Canadians (76%) think homeownership is in their best financial interest long term. So says a recent consumer survey by Mortgage Professionals Canada. This opinion was consistent (plus or minus three percentage points) among all age groups.
Comparatively, just 8% felt they’d be further ahead financially by renting. Those aged 23 to 27 were most likely to think so.
The financial merits of homeownership vs. renting have been debated to death. But the report’s author, MPC Chief Economist Will Dunning, argues the latest research gives the win to homeowners.
“In most situations, owning a home provides a positive (and tax-free) ‘rate of return’ on the owner’s investment of equity, and that rate of return rises over time,” he writes.
Acknowledging that buying a home is not easy—respondents ranked it the second-most stressful major life decision—Dunning suggests it’s worth it, citing multiple reasons that make homeownership attractive.
“We do it because we believe that it will make us better off than if we rent (but) we also buy homes because we see non-financial advantages,” he said.
One of the top non-financial reasons cited by Canadians was having a “stable” home base.
Impact of the New Stress Test
Among those planning to make a home purchase in the next year, the survey found approximately eight out of 10 are aware of the new stress test requirements.
QUICK EXPLAINER: In recent years the federal government has introduced stress tests for virtually all almost new prime mortgages to ensure borrowers are able to meet their monthly payment obligations in times of economic stress, like fast-rising rates. For insured mortgages (typically where the down payment is less than 20%), the mortgage is tested at the Bank of Canada’s benchmark five-year posted rate, which is currently 5.19%. For uninsured mortgages funded by federally regulated financial institutions, the mortgage is tested at the greater of the five-year posted rate or two percentage points above the borrower’s contract rate. Provincially regulated lenders, like credit unions, are not bound by these rules on uninsured mortgages.
Those polled were of two minds about the stress test rules.
On the one hand, respondents agreed (answering 6.84 on a scale of one to 10, with 10 being “strongly agree”) that the stress tests will achieve their stated objective to “ensure that homebuyers will still be able to afford their homes if interest rates rise by a large amount in the future.”
But on the other hand, they also agreed (6.62 out of 10) that the stress tests “will result in more people having to turn to more expensive mortgage options from lenders.” We’re already seeing that today, with non-prime and credit union lenders stealing market share from banks.
Dunning shared his own concerns with the stress tests, one being that the reference interest rate is being set by the lenders that are being regulated and that “…their rate-setting decisions will be based on their own needs and preferences rather than by any market mechanism.” We see that today with major banks refusing to cut five-year posted rates materially despite dramatic drops in bond yields.
He sees two problems with this. “Firstly, there is no reason why this process would necessarily produce an estimated interest rate that is ‘correct’ for the purpose,” he wrote. “Secondly, the regulations might give lenders some incentive to keep the reference rate artificially higher than they would otherwise (so that they have more opportunity to “capture” their clients at renewal, blocking higher-debt ratio customers from switching lenders for a better deal).”
On 30-Year Amortizations
Politicians talk frequently about making housing more affordable for first-time buyers. One idea being floated is the return of 30-year amortizations on insured mortgages. As some will recall, the maximum insured amortization period was reduced from 30 years to the current 25 years in 2012.
MPC’s survey found most Canadians are in favour (6.71 out of 10) of reinstating longer amortizations. Respondents agreed strongly (6.85 out of 10) that bringing back 30-year amortizations would “allow homeowners to control their payments in the critical early stages of their mortgage.”
However, there was agreement (6.15 out of 10) that this would “result in more Canadians being worse off overall at the end of their mortgage” (that’s not necessarily true) and that it would “result in more Canadians purchasing homes that they can’t afford” (6.72 out of 10).
CMHC head, Evan Siddall, has been a vocal opponent of the idea. He argues that longer amortizations will inflate home prices overall, thus negating the benefit. That effect, of course, would be offset if governments fostered more policies to increase housing supply, something that’s been desperately needed for years as people flood our biggest cities.
Dunning noted that 44% of the 1,991 survey participants preferred 30-year amortizations to counter high home. Only 27% thought the government’s recently launched First-Time Home Buyer Incentive was the answer to affordability.