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Raising The Maximum Insured Mortgage Size

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Canada Plans To Foster Its Real Estate Bubble By Raising The Maximum Mortgage Size

Canada plans to increase credit access for the country’s riskiest borrowers in the years to come. A re-elected government may not seem like change, but they promised a big one — larger insured mortgages. High-ratio borrowers will see an increase of up to 25% of their maximum mortgage size. Expansion of credit during a low inventory market is one of the fastest ways to increase prices. It was one of the primary drivers of growth during the US real estate bubble, prior to the Great Recession. It’s an odd policy to embrace, and likely to push prices higher, or at least prevent them from falling.

Canadian Insured Mortgages To See The Max Increase By 25%

Canada is planning to increase the maximum that can be borrowed on a high ratio mortgage. High ratio mortgages are those where the buyer puts less than 20% down on the purchase price. Currently, buyers are limited to home prices of less than $1 million. If the proposed changes go through, this will increase by 25% to $1.25 million.

Further, the high ratio maximum will no longer help to slow growth for cheaper housing. It will be indexed to the Consumer Price Index (CPI) as well. This is somewhat ironic, since shelter costs are nearly a third of the CPI index. Bubbles will now self-adjust as they push the credit boundary higher. It’s the human centipede of mortgage plans.

High-ratio mortgages were originally designed for low-income households to break into the market. It makes sense for taxpayers to take on that sort of risk, since it helps build the middle class. That’s not what’s happening here. To take advantage of a $1.25 million maximum mortgage, a household needs at least $155,000 per year in income. In addition, they would need at least another $250,000 for the down payment.  

In other words, the boutique change is designed for higher income households. At that income level, they would be making about 72% higher than the median household. It’s just under the cutoff for the top quintile of household incomes. Hey, I guess that’s what a first-time homebuyer makes now. Over two-thirds more than a typical household across the country.

Expanding Access To Credit Pushes Home Prices Higher

Credit expansion during a housing boom leads to higher home prices. It’s straightforward to anyone that thinks about it for just a second, but let’s walk through this. Buyers and sellers have competing interests — the former the lowest prices, and the latter the highest. In the event of low supply availability, the negotiation slants in favor of the seller. The problem is they can only take as much as the buyer can borrow, and not more. Prices are capped by liquidity, and this is a market fundamental. 

What do you think happens in a low supply environment, and the government gives the buyer 25% more money? It’s now the seller’s obligation to extract that additional capital. The increased credit gets capitalized into the price, pushing prices higher. Since these are first-time buyers, it acts primarily on the price floor. In other words, it pushes up the cost of the most affordable housing. It has little impact on the most expensive stuff.

It’s not just a theory, there is plenty of evidence supporting how this works. It was found to be one of the key reasons behind the US housing boom that preceded the Great Recession. BMO recently warned against this type of action, since the market would only absorb it. Even the Bank of Canada (BoC) internally acknowledged credit expansion drives home prices higher. Now that this is established, let’s talk about who influences home prices — the marginal buyer. 


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