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Canada's Mortgage Rules Could Leave Millennials Hanging, Study Says

And save them from themselves.

Canada's new mortgage rules could leave millennials struggling to buy a home, realtors say.

But there are benefits, too. Such as keeping them from buying units they can't afford.

Millennials could lose as much as 20 per cent of their "purchasing power" when new federal mortgage rules kick in on Oct. 17, the B.C. Real Estate Association (BCREA) said Thursday.

"Purchasing power" describes a consumer's ability to buy goods and services. In this case, it means the amount they can borrow to buy a home.

The BCREA arrived at its conclusion using a family with a household income of $80,000.

Such a household can currently buy a $505,000 home with a five per cent down payment.

But that wouldn't be possible under the new rules because of a "stress test" requiring all insured mortgages, which have down payments of less than 20 per cent, to be qualified at higher rates, the BCREA said.

This hypothetical family could only buy a $405,000 property under the new rules — $100,000, or 20 per cent less than what they could have had before.

But this family would be borrowing well beyond their means, as defined by the Canada Mortgage and Housing Corporation (CMHC).

The CMHC considers housing affordable if it takes up less than 30 per cent of before-tax household income. This family would be borrowing $479,750 if they bought a $505,000 home with a five per cent down payment.

Spread that money over 25 years (a mortgage's maximum amortization period), add a three-per-cent interest rate, and house payments would cost the family 34 per cent of their income.

"The purchasing power of mostly young buyers is going to be reduced significantly."

Add in maintenance fees, property taxes, and heating, and the family is paying much more than it can afford.

Even a $405,000 home would stretch this family's budget, costing them as much as 27 per cent of their income.

Add in $400 per month alone for maintenance fees, and the family is putting 33 per cent of their income toward housing.

Economist Brendon Ogmundson told The Huffington Post Canada the BCREA this example is an "abstract illustration."

"The idea of the piece is still the same, in that the purchasing power of mostly young buyers is going to be reduced significantly," he said.

Ogmundson is "sympathetic" to the idea that, over the long term, these changes could lessen Canada's vulnerability to economic shocks or interest rate increases.

But he nevertheless sees it causing problems in the short term.

"I think that the downside risk to tightening credit like this, at least in the next 12 to 18 months, is sharper, lower demand, potentially lower prices, as well as a decline in construction activity," Ogmundson said.

A mortgage change like this can also lead to increased demand and lower supply, which can add to price pressures, he added.

A good thing, maybe

The new rules are aimed at calming rising levels of debt across the country. The latest government data shows the debt-to-disposable income ratio at 167.6 per cent, a record high.

If the stress test were applied today, it would force homebuyers to prove they could still pay off their mortgage if interest rates rose to 4.64 per cent — a higher expense for many buyers, considering many recent mortgages have rates of around three per cent.

UBC business professor Thomas Davidoff doesn't disagree that millennials and first-time homebuyers will have more difficulty buying homes under the new rules.

But there's a trade off: "It prevents people from borrowing as much as they might like to borrow, and they may be protecting them from themselves," he told The Huffington Post Canada.

Davidoff said people often "don't appreciate the risk they're putting themselves into when they pay a lot for a house and stretch what they can afford in terms of payments."

But he also doesn't think CMHC's 30 per cent benchmark for affordability should apply so broadly.

"If you're a young household in an expensive housing market, I don't know that I would respect that affordability number," Davidoff said.

He added that people often adjust their payments at various points in a mortgage's lifecycle.

"Somebody who's 60 should be spending a smaller fraction on mortgage than somebody who is 28 in Vancouver."

"Somebody who's 60 should be spending a smaller fraction on mortgage than somebody who is 28 in Vancouver," Davidoff said.

As for millennials, if they can't afford housing, they can always rent, he said — although that, too, has proven challenging in some cities.

"It's not like you're locking them out of the housing market by doing this," Davidoff said.

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