In my last article I made it known that I was of the opinion that lending guidelines should be static – and not change with the wind (you can read that article here Are Lending Changes Bad for the Housing Market?). I finished off my last article with this note:
You may be saying, “Well, the economy was hot for a while and it is better to have the looser guidelines and have higher movement for a while than not at all.”
Then I asked you to read this current article to see why the above question harbours an incorrect theory. Well, here it is:
Do you remember the NEP (National Energy Program)? Our friend, Pierre Elliot Trudeau introduced that for us. The long and short of the NEP is this: Trudeau believed that the oil-rich Alberta had too much money. So, Trudeau decided that it was time to share the wealth and reduced the amount of money that the rest of the provinces would pay for oil from Alberta (this was significantly below market price). It is estimated that the NEP cost Alberta approx. $99 billion. Anyway – the purpose of this article is not to express opinion over who actually owns the oil, but rather, it is to determine the effects of the NEP. The reason why the NEP was so toxic was because it was taking away something that had once been Alberta’s – everyone in Alberta was living based on the rest of Canada paying full price for our barrells of oil. The moral of the story is this: if you must scale back, do so – but don’t increase/broaden the policies, then take it away later (that’s just teasing us).
So, should Trudeau have instituted the NEP? Maybe not, but the NEP was based on principle, if he had increased Alberta’s income, then taken it away – that would have been criminal (similar to what the government is doing to the market today).
Anyway, I still haven’t addressed the issue at hand, which was – is it better to make hay while the sun shines (even if there are sunny patches) or is it better to make hay slower, with an overall consistency in the illumination from above. My opinion: the latter is the way to go (it gives the market more certainty and, I would guess, that it would result in more sales overall than loosening and tightening guideliness). I think it would result in more overall sales because people know what to base the economy on – if the guidelines are being thrown around all the time, eventually the government’s loosening of guidelines are seen as so temporary that it is ineffective.
Trevor Hickey, B.A.
Mortgage Associate
Concord Mortgage Group Ltd.
#107 – 1905 Centre Street NW
Calgary, Alberta
T2E 2S7
Bus: (403) 290-1990
Cell: (403) 860-8738
Fax: 1-888-587-1426
Email: trevor@concordmortgage.ca
Website: www.mortgagebrokercalgary.info
Popularity: 9% [?]
Changes are bad for the market – fixed decisions are good – changes (that are in our control) are the product of indecision. I heard once (from a Brian Tracy tape series) that there was a study done on store managers, some were very successful and others were not successful at all. The study consluded that the main difference between the two types of managers (and what ultimately determined if they were successful or not) was their decision making. It turned out that the lesser achieving of the two managers often made the right decision and the more productive of the two often made the wrong decisions – it was simply that the latter stuck to their decisions, rode out the consequinces, learned, and moved on. The former managerial type would decide, ponder, then re-decide (never actually doing anything). The lesson of the study is simply this: decide, then act – don’t decide, decide, and then decide.
The recent lending guideline changes are simply a product of the government’s indecision – back a few years ago, while the economy was motoring ahead, it was decided that the economy could handle 40 year amortizations and 100% financing. Now, since the market isn’t so hot, they’re deciding against this. Well, if the policies hadn’t changed in the first place, there wouldn’t have been a sudden “reigning in” that we just experienced.
You may be saying, “Well, the economy was hot for a while and it is better to have the looser guidelines and have higher movement for a while than not at all.”
See my other article on why that train of thought is incorrect: Is it better to make a fortune quickly – or over time?
Trevor Hickey, B.A.
Mortgage Associate
Concord Mortgage Group Ltd.
#107 – 1905 Centre Street NW
Calgary, Alberta
T2E 2S7
Bus: (403) 290-1990
Cell: (403) 860-8738
Fax: 1-888-587-1426
Email: trevor@concordmortgage.ca
Website: www.mortgagebrokercalgary.info
Popularity: 5% [?]
The name of this article is “Why Fluxuating Amortization and Down Payment Requirements are Bad for the Economy”; however, it should actually add “and why it gives inaccurate housing values”. First of all – lets tackle the theory that this article is based on.
The Theory: As amortization increases more people can afford houses (because payments are less and are more in reach).
This would be great if amortization stayed the same (or increased; therefore, making the market broader and broader and increasing the demand & competition for houses and therefore increasing housing values). BUT that isn’t the way it works – amortization flys all over the place, from 25 years to 40 years to 30 years… The reality is this – unless you’re prepared to keep amortization the same, don’t increase it. It just ruins the market by making the demand for housing higher, then lower, and those who bought in the high point are unable to get their money back out.
Suggested related article: Are Lending Changes Bad for Housing Market?
Trevor Hickey, B.A.
Mortgage Associate
Concord Mortgage Group Ltd.
#107 – 1905 Centre Street NW
Calgary, Alberta
T2E 2S7
Bus: (403) 290-1990
Cell: (403) 860-8738
Fax: 1-888-587-1426
Email: trevor@concordmortgage.ca
Website: www.mortgagebrokercalgary.info
Popularity: 9% [?]
The lending guidlines changed again this week. The changes are:
- 30 year amortization (maximum)
- Can only refinance to a maximum of 85% of the house value
There are more changes; however, these are by far the most potent. Now, you may be wondering if this will affect the lending/housing market. The answer…NO!
The reason why this won’t affect the market is simply because the changes were already in place before anouncing them. There is a difference between what the “guidelines” are and what the reality is. The truth is – CMHC has been implementing these policies for (in my experience) about 6-12 months. The only way you would have received an approval from CMHC, lately, for a refinance of 90-95% and an amortization of 35 years, is if you were made of gold and, therefore, didn’t need it.
Just my observation!
Suggested related article: Why Fluxuating Amortization and Down Payment Requirements are Bad for the Economy!
Trevor Hickey, B.A.
Mortgage Associate
Concord Mortgage Group Ltd.
#107 – 1905 Centre Street NW
Calgary, Alberta
T2E 2S7
Bus: (403) 290-1990
Cell: (403) 860-8738
Fax: 1-888-587-1426
Email: trevor@concordmortgage.ca
Website: www.mortgagebrokercalgary.info
Popularity: 6% [?]
