The affordability equation

New mortgage rules plus cost factors equal big decisions for today's home buyer

Brad Ridler sounds like many first-time homebuyers, anxious to move into his just purchased condo and start putting "a lot of good things in motion."

But when the 32-year-old Ridler and his fiancée Courtney Boyce started their home search more than a year ago, the marketing professional was acutely aware of all the obstacles, including certain financial requirements associated with new mortgage rules.

So aware that, being employed in an energy-related industry during an economic downturn, he and Courtney (who works in the hospitality industry) rented for another year until both changed jobs and saved more money for a deposit.

"I was following real estate closely, and knew of the CMHC (Canada Mortgage and Housing Corporation) changes, so we saved and then borrowed from a family member," to ensure a 20 per cent deposit, said Ridler, now employed in the agriculture industry.

The CMHC changes include a "stress test" for all new high-ratio insured mortgages, including those where the buyer has more than 20 per cent for a down payment.

That test initiated last fall assures lenders that a given home buyer could still afford the mortgage if interest rates rise. A new home buyer needs to qualify for a loan at the negotiated rate in the mortgage contract, but also at the much higher Bank of Canada's five-year fixed posted rate (currently 4.64 per cent).

The CMHC changes include a "stress test" for all new high-ratio insured mortgages, including those where the buyer has more than 20 per cent for a down payment.

For Ridler and Boyce, the stress test meant they qualified for a lower priced home than before the changes, but the larger down payment meant they didn't require mortgage insurance.

With November's new mortgage rules and March's increased insurance payments (jumps of $5 to $15 per month, depending on the size of the mortgage), Ridler and Boyce are part of today's new affordability reality.

While past generations bought their first single family home in the suburbs, "for my generation it's a condo, if we're lucky," said Ridler.

This January, the couple started looking again, purchasing a $290,000 two bedroom-two bathroom condo with upgrades, in Cardel Lifestyles' Walden Place, in the southeast community of Walden. They will move into their new home this August.

"It's close to our new jobs, in a new neighbourhood with a good vibe. We're happy," said Ridler.

The new mortgage rules are just part of pressures affecting housing affordability that also include the provincial carbon tax, building code changes and the rising cost of U.S. products, says Allan Klassen.

As chair of BILD Calgary (Building Industry Land Development, representing housing industry builders and developers) and senior vice-president of housing for Brookfield Residential, Klassen describes the increased financial pressures as "all snowballing into the affordability bucket."

That means potential buyers are being challenged to look at the style of housing they can afford, buying smaller homes or shifting from single-family living to attached homes.

But having said that, the spring home buying season has, so far, been relatively strong, with entire new communities coming on stream – something that hasn't occurred for some time.

Richard Cho, CMHC's Calgary market analyst, says between five and 10 per cent of all prospective buyers were expected to be affected by the mortgage changes.

For those buyers, he also predicted a shift away from single-family product to a townhome or other multi-family unit, or even a decision to save for a larger down payment and wait to buy.

Cho also sees optimism in Calgary's housing market, with a decrease in resale listings and a modest gain in employment growth (particularly in full-time jobs).

He says new home buyers appear aware of mortgage rule changes through media coverage and because CMHC educated lenders on new rules.

"If buyers aren't aware, they will become so early in the process."