Everything You Need to Know About Canada's New Housing Rules
October 3, 2016
Today the Canadian government announced several major changes to mortgage rules. The changes seem to be aimed at curbing high demand in two of the country's fastest growing markets - Toronto and Vancouver - with seeming disregard for the potential negative consequences in other markets across Canada.
What Are The New Mortgage Rules?
- The government will restrict insurance on mortgages to loans on owner-occupied dwellings with amortization periods less than or equal to 25 years, purchase prices (not loan amounts) of less than $1 million, and for borrowers who meet a minimum credit score standard of 600.
- All insured mortgages in Canada (i.e. any mortgage where the borrower puts less than 20% down OR portfolio insured mortgages - i.e bulk insured loans with MORE than 20% down) will be underwritten using posted rates to qualify borrowers based on their income. For perspective, based on today's rates, that means a borrower that could qualify for a mortgage at a 5-year fixed rate of 2.29% now will have to qualify - as of the 17th of October - at the qualifying rate of 4.64%.
- Foreign buyers will need to prove that a home they sell is their primary residence to avoid capital gains tax exemption abuse.
- Oh yeah: OSFI is also driving up capital requirement costs which will probably make insurance premiums go up and interest rates too. This was announced on the 23rd of September to less fanfare but goes into effect in January 2017. Bonus.
UPDATE - OCTOBER 17, 2016
Just received word from the Mortgage Professionals of Canada association that the Department of Finance has deferred the implementation of stress testing for those buyers that are making a down payment of 20% or more.
Effective today, only borrowers with less than 20% down payment are required to qualify at the Bank of Canada rate. Down payments greater than 20% will not have to qualify at the BoC rate until November 30. This change effectively provides an additional six weeks for lenders who rely on portfolio insurance for low ratio mortgages to find alternate means to finance their activities.
How Will These New Mortgage Rules Affect the Housing Market?
Well, as we've said a million times on this blog: THERE IS NO NATIONAL HOUSING MARKET. The reason these changes have come to pass is because of lots of growth in the Vancouver and Toronto house prices. Incidentally, the CBC reported that Vancouver's market was already softening - A MONTH AGO.
The stated goals of these rule changes are - according to Finance Minister Bill Morneau - to help middle class families who see prices "climbing often out of their reach". Some are even "in a rush to buy before it's too late." If you read between the lines here the goal is to monkey with the market so some people in certain parts of the country can still buy a home...instead of, you know, moving somewhere else where they can afford a home, or renting, or pursuing a higher paying career so they can afford a home, or buying a condo instead of a house. The government would hate for people to have to actually do something for themselves and act like a normal market or something.
The effects of these changes are hard to predict on each individual housing market in Canada - but it's a safe bet that it'll cool the hot ones. It'll also cool the mediocre ones. It'll almost certainly cool the already cold markets. Basically it's a big wet blanket over the entire country inspite of the vastly different real estate markets, job markets, economic conditions, political climates, and housing supply available in various regions.
Who Wins and Who Loses?
- The big five banks. Why? Because they have deposits to cover many of their conventional mortgages (i.e. loans at less than 80% loan-to-value) so they don't need to portfolio insure. Some of these changes make the market less competitive for them.
- Fence sitters. People who gripe and complain because they were waiting for the market to soften - and it didn't - until the nanny state intervened. Good news! Now you can buy that home you always secretly wanted while blogging about how it's really better to rent after all because freedom or something.
- The guys who have been writing books about the housing bubble for the last six years and who have been dreadfully wrong forever. There's a possibility that some markets might correct. Congratulations - the clock might stop for you.
- Existing homeowners. Your home just got harder to sell. Sorry.
- Anyone who bought a home recently. Your home may be worth less now than when you bought it recently and it might take awhile to catch up.
- Future home buyers. It just got harder to qualify even though from a practical perspective mortgages aren't more expensive...yet.
- Builders. Your unsold inventory just got even more unsold. Also, instead of being a potential market solution to a chronic undersupply in strong markets, now you might just go out of business instead. #notwinning
- Canadians. Under the guise of protecting taxpayers these changes have made the entire mortgage marketplace less competitive. These changes are one more of a long list of anti-competitive rule changes that have driven up costs for monoline lenders to the benefit of the big five banks - due in no small part to their lobbying efforts after losing massive amounts of market share to mortgage brokers and alternative lenders. This intervention in a functioning marketplace will result in a hidden tax to consumers of billions of dollars in higher interest payments over the coming years and higher profits for Canadian banks.
- Anyone who doesn't live in Vancouver or Toronto.
- Anyone intending to profit from the high demand, low supply, market fundamentals of Toronto and Vancouver.
- Anyone who was making a reasonable, rational, home buying decision based on local market fundamentals. The government just pulled the rug out from under you with two-weeks notice. Nice.
Where Can I Get More Information?
- Call and talk to a mortgage broker
- Bloomberg talks about the market for Canada Mortgage-Backed-Securities
- Financial Post says that the new rules will reduce the risk to our economy
- Rob Carrick at the Globe thinks this is awesome (he must live in Toronto)
- Moneysense does some math which helps
- The Globe and Mail details four major changes to the mortgage rules
What Should I Do About It?
If you're a homebuyer and you have a pre-approval, then talk to your mortgage broker because the numbers you qualify probably just changed. If you're a seller you might want to accept the next offer that walks in the door before it's too late. If you're thinking about renovating your home before you sell it then reconsider your plans because you just lost more money on your renovation.
What tends to happen when the government makes changes like this is it brings forward all kinds of demand. People rush to qualify so they can get the home they wanted before the rules make it harder. The government has figured this out the last couple of times and instead of giving two months' notice, now they give only two weeks. Not enough time to really do much. The long and the short of it is this: people still need to live somewhere and owning a home right now is still better than renting because you get to pay yourself. Everyone's expectations about how much house they can buy just needs to change as a result and this will likely result in a short-term drop in prices in some markets as sellers come down to meet buyers where they're at.
What Are Some Possible Silver Linings?
I know this post isn't super enthusiastic but here's some possible good news, especially if you're living in a market that's been slow already: It's possible - but I don't know how probable - that making homes harder to qualify for in big markets might force people to look elsewhere (hint: Edmonton!) for affordable housing. To Edmontonians that wanted to buy a place for $420k but now have to stay under $380k, for example, the lack of properties in that price range just got worse...but for Edmontonians looking to sell a $450k home to a displaced Torontonian who sold for $725k, you might have a relieved buyer on your hands. It's all relative. Talk to a good Realtor to understand the local market better. If you don't know one then get in touch - we know several and are always happy to refer people to the good ones.
Realistically, How Bad Is It?
If you want to play around with the numbers you can use our Canadian Mortgage Pre-Qualification Calculator to see. I did a quick test and if you have an annual household income of $60,000 and all other variables remain the same, the difference between the old rules and the new rules are a $338,000 home vs. a $272,000 home. Not earth shattering, but your purchasing power just went down by $66,000.