BuzzBuzzHome Corp.
February 17, 2010

What is the difference between a real-estate speculator and a real-estate investor?

I always imagined that a speculator quickly flips properties, whereas an investor rents out properties.

No matter if they are speculators or investors, such purchasers are a key target of the federal government’s reforms to the mortgage market.

Jim Flaherty – the Finance Minister in the hot seat – claims to be targeting “reckless” speculators with the new mortgage rules introduced yesterday… which will make it tougher for Canadians to get a mortgage. According to Flaherty the goals are to:

1. protect Canadians from overextending themselves financially as interest rates are likely to climb from present historic lows; and,

2. root out speculation in real estate, which he suggested was happening with greater frequency based on pre-budget consultations.

Where did this come from? Concerns that the real-estate market is overheating, as buyers take advantage of record low interest rates not to mention warnings from the former Bank of Canada governor David Dodge about an impending housing bubble. BUT DON’T WORRY! Flaherty said there was “no clear evidence” of a real estate bubble in this country, the kind of which sideswiped the U.S. economy and sparked the worldwide financial crisis. PHEW! Good thing Flaherty cleared that up for everyone.

According to one article in the Financial Post:

“Of course, historically low lending rates have boosted borrowing. Between 1999 and 2005, total debt in Canada increased by 47.5%. This was largely due to mortgages. And a new study by the The Vanier Institute of the Family has found many households sank even further into debt in 2009, creating the highest debt-to-income ratio ever seen in Canada, according to the organization’s annual assessment on the Current State of Canadian Family Finances, released yesterday.

The study showed the average Canadian household debt climbed to $96,100, creating a debt-to-income ratio of 145% in 2009, the highest it has ever been.” Financial Post

Will this change affect you? Depends… are you a speculator?? “The measures will not affect the ability of a Canadian family to buy a house. It will affect those who are speculating,” Flaherty says. “What we’re getting at is the speculation in multiple condominium units in particular which we see in Vancouver, Montreal, Toronto and in some other places in Canada.”

Yes. It will be harder for first-time buyers to qualify for government-backed mortgage insurance (from the Canada Mortgage and Housing Corp. and from private-sector providers — which is required if down payments are less than 20% of the property’s value.) Borrowers will have to meet standards for a five-year fixed-rate mortgage… even if the buyer wants a shorter-term, variable-rate product. Hmmm.. maybe it is time for speculators to look for uninsured mortgages?

According to the National Post:

“Some analysts, however, indicate the shift is not as big as it appears. Eric Lascelles, chief economist at TD Securities, said the revamped rule likely means the minimum household income cut off for Canadian mortgage applicants would be about $5,000 to $8,000 higher.

Further, Ottawa has raised the minimum down payment on rental income properties — where the buyer does not plan to live– to 20% from 5%.” National Post

Of course… Home builders were taken aback by the measures introduced.. with the program taking effect on April 19 – around the time of the HST – it could create the Perfect Storm (good thing I caught that movie this weekend) for the condo and housing markets. How much of the market is fuelled by speculators?

The National Post reports: “Derek Holt, vice-president of economics at Scotia Capital, said the condo market could feel the pinch. Industry experts estimate roughly 40% of condo purchases are investment-related, with buyers looking to rent the units for income and perhaps sell them at a later date at a higher price.”

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