TORONTO, ONTARIO--(Marketwire - June 26, 2012) - New mortgage rules announced by Finance Minister Jim Flaherty will increase the odds of a soft landing for the housing market, according to BMO Economics.
The rule changes announced last week - which take effect July 9, 2012 - include reducing the maximum amortization for government-insured mortgages to 25 years from 30 years.
Sal Guatieri, Senior Economist, BMO Capital Markets, noted that the strong May price numbers add further validation to the new measures. Canadian home price growth remained strong in May and continued to run faster than incomes, as strength in Toronto and a pickup in Calgary offset some moderation in British Columbia cities.
The Home Price Index rose 0.7 per cent month-over-month in May, led by Calgary (1.0 per cent) and Toronto (0.9 per cent). Prices rose in each of the six regions covered by the index, including in Vancouver (0.6 per cent). Compared with a year ago, national prices are up 5.2 per cent, an unchanged pace from April.
"The new rules, which limit the availability of insured mortgages to amortizations of 25 years or fewer and to homes worth less than a million dollars, will curb demand and thus dampen prices," said Mr. Guatieri. "By our estimate, to neutralize the impact on mortgage payments of the amortization rule change, average home prices would need to fall about 3 per cent. By helping to cool the market now, the rule changes should increase the odds of a soft - rather than hard - landing."
Laura Parsons, Mortgage Expert, BMO Bank of Montreal, added that the new rules are prudent and timely, and should help ease the debt burden faced by many households and prospective homebuyers.
"The math is simple - the shorter the life of the mortgage, the less you pay in interest," said Ms. Parsons. "An amortization of 25 years or fewer also allows Canadians to build equity in their home sooner, which ultimately helps homeowners throw a mortgage burning party sooner and put more money towards other financial priorities, such as post-secondary education expenses or retirement."
About BMO Financial Group
Established in 1817 as Bank of Montreal, BMO Financial Group is a highly-diversified North American financial services organization. With total assets of $525 billion as at April 30, 2012, and more than 46,000 employees, BMO Financial Group provides a broad range of retail banking, wealth management and investment banking products and solutions.