In typical after-the fact-fashion the Canadian government today announced necessary but way late changes to the terms available on mortgages backstopped by Canadian tax payers via the Canada Mortgage and Housing Corp (CMHC).

Buyers with less than 20% as a down payment have until now been able to receive underwriting insurance via the CMHC for up to 85% of property values stretched over an amortization of up to 30 years. Today Conservative Finance Minister Flaherty announced that effective July 9, new home buyers will ‘only’ be able to borrow up to 80% of property value and stretch the repayment schedule over a 25 year amortization. The impact of this change is significant. Shortening the amortization on a conventional mortgage from 30 to 25 years, means an increase in monthly payments of 12.5%. At today’s average Canadian house price of $375,000 this change works as follows:

$375,000 home – 20% required down payment of $75,000= $300,000 to finance
$300,000 mortgage at 25 year amortization vs 30 year amortization = +12.5% higher payments per month.

And that is assuming that today’s generational lows in interest rates continue indefinitely. When (not if) mortgage rates do start to normalize back to historic averages, the impact will be enormous. When mortgage rates move from the 3% range today to just a 5% range in the future, this will dictate a further 23% increase in monthly carrying costs and that does not include the burden of similar interest cost increases on all the other credit that Canadian families are carrying today.

Few seem to comprehend that Canadian households are now (heading into the next global downturn) encumbered with the highest consumer debt levels in history at more than 154% debt to disposable income. This is higher than the Americans were carrying at the peak of their credit bubble in 2006. Six years later US housing has fallen more than 30% and is likely to fall another 20% before prices fulfill their destiny of reverting to historical averages. Canada has not yet started into the downside correction of our now 15 year housing run up. And we are starting into this one with a total debt to GDP ratio that leads the most indebted nations in the world, north of 425%.

These mortgage changes were needed for a reversion to some semblance of sanity in government policy in this area. But they will dampen housing demand without question. Canadians will need to save or find more up front before they can buy and will be able to pay less in order to carry less mortgage monthly. This all presents large downside risk to Canadian real estate markets, to an aging population over-invested in housing, to our over-exposed banks and of course for we the taxpayers and our government’s naive promises to balance the Federal budget by 2015.

The ironic part is that the Canadian government said it is making these changes now in order to “avert a household debt crisis.” Sadly that horse left the barn a few years back, aided in large part by this same government that in 2006 made it their first order of business to extend CMHC coverage to 40 year amortization, interest only and 95% financed mortgages! 6 years later, this government is just trying to undue the mistakes it implemented at the outset. Unfortunately their back-peddling now does not do anything to remove the high risk mortgages that have become the 600 billion dollar responsibility of Canadian taxpayers via the CMHC underwriting.

The important lesson here is to understand that Canada has earned its present credit bubble and we will suffer the fall out just as every other over-indebted country and family is doing elsewhere today. If history is a guide we will all now receive a concentrated education in the downside of debt which will change our attitudes and behaviour for the next 20-30 years.