Tighter mortgage rules weigh on market

The Lower Mainland's cooling real estate market got another splash of cold water with Ottawa's decision to ban government-backed mortgages stretched over 40 years or taken out with no money down.

The federal government cited the risk of a U.S.-style housing bubble and collapse in reinstating a minimum five per cent down payment and capping mortgage terms at 35 years.

Credit Union Central of B.C. chief economist Helmut Pastrick called it a "prudent" move that should reinforce Canada's cautious home lending reputation.

But he also predicts the changes will put more downward pressure on Metro Vancouver real estate prices.

"It will have a dampening effect," he said. "There will be relatively fewer first-time or low-equity buyers participating in the market."

A maximum 35-year term and higher down payment requirements mean some buyers won't be able to afford to pay as much, Pastrick added.

He said the elimination of the zero down payment will probably have the greatest impact.

It's been less than two years since the Canada Mortgage and Housing Corp. (CMHC) made it possible to get a 40-year mortgage at zero down, a move some analysts criticized as reckless at the time.

Large numbers of buyers immediately began taking advantage of the looser credit rules, particularly in high-priced areas such as Metro Vancouver.

The change back takes effect Oct. 15, giving time for already pre-approved buyers to close deals.

Some private firms could still offer mortgage insurance at no longer supported terms, but they won't have federal backing.

Some observers say the delayed implementation could actually heat up buying activity over the short term until the change kicks in.

Longer amortizations saddle owners with much higher interest costs over the life of the mortgage.

The 40-year no-money-down mortgages were seen by some as a way to get into the market on the basis prices would continue to rise rapidly.

But double-digit annual gains in local property values have stopped and prices have even started to decline in some areas.

"The market this year is still going to head lower," Pastrick predicted.

jnagel@surreyleader.com