‘Innovations’ in lending minimize drop in new-home construction
New-home construction in Canada is set to cool slightly next year, and would likely drop more precipitously if not for the widespread adoption of longer-term mortgage products, according to one economist.
Housing starts are expected to pull back about 6 per cent in 2008 as rising prices curb demand, according to an outlook report by the Canada Mortgage and Housing Corp (CMHC).
“The pullback in housing starts next year will be mainly due to increases in house prices in recent years, which have pushed mortgage carrying costs higher,” Bob Dugan, chief economist at CMHC, said in a statement.
This would still put new-home construction at a relatively strong 214,000 units in 2008, the seventh consecutive year in which they’ll top the 200,000 mark, according to the report.
Lofty prices in the country’s hottest markets, particularly Western Canada, would likely take a much bigger bite out of new construction if it weren’t for longer-term mortgage products, said Derek Holt, assistant chief economist at Royal Bank of Canada.
Last year, the federal government extended the maximum amortization period for mortgages from 25 years to up to 40 years.
Consumers have embraced these products, which raise the cost of a mortgage over time but lower the entry hurdle to buying a home because the longer payment period allows for smaller monthly payments.
“It’s my belief we would be 10 to 20 per cent below 200,000 housing starts next year if it wasn’t for the impact of these mortgage innovations,” Mr. Holt said.
Sixty per cent of new and rollover insured mortgages are for amortization periods of longer than 25 years, and half of those are for 40 years, Mr. Holt said.
The economist expressed concern that people taking out 40-year mortgages aren’t leaving themselves any buffer in the event of future rate shocks.
Buyers should also be aware of the much higher overall interest cost of a longer-term mortgage.
For example, the total interest on a $300,000 mortgage can soar from $286,161 over the life of a 25-year mortgage to $498,416 over a 40-year amortization period - adding more than $200,000 to the cost of the home.
In the resale market, sales of existing homes are poised for their best year on record, with slightly more than 521,000 units expected to be sold in 2007, as measured by sales on the Multiple Listing Service sponsored by the Canadian Real Estate Association.
The 7.8-per-cent increase in volume from 2006 is attributable to booming sales in the Prairie provinces.
However, purchases of resale homes are expected to slow somewhat in 2008 to slightly more than 500,000 units, a drop of about 3.9 per cent.