In response to concerns that some markets in Canada are ‘overheated’ and that Canadian debt levels continue to increase, Ottawa has announced new rules. These changes are meant to alleviate risk in Canada’s housing market but may have a significant impact on the housing market, especially first time home buyers.Some of the highlights:
Effective October 17th, all mortgages that require mortgage default insurance, which are typically those with less that 20% down payment, will now require borrowers prove they can qualify based on a higher mortgage rate set by the Bank of Canada called the “benchmark rate”. This measure was previously in place for mortgages with terms less than 5 years or variable rate mortgages, but will now apply to all mortgages, including 5-year fixed rate mortgages.
Effective October 3rd, a tax loophole was eliminated that allowed non-residents to buy homes in Canada, and then get a tax exemption to avoid paying capital gains when selling that home by claiming it as a principal residence. This increased scrutiny will ensure that the capital gain exemption is not abused, specifically by preventing non-residents from becoming residents then buying and selling a property in the same year.
The Government will continuously monitor the housing market to ensure that Canada’s housing finance system is healthy, competitive and stable by ensuring the market is balanced and appropriately reflects all parties’ abilities to share in the management of housing risks..
Here are the changes in a nutshell:
- “Mortgage Rate Stress Test” for ALL insured mortgages
This means that all insured mortgages will now be qualified at the Bank of Canada Benchmark Rate (currently 4.64%) instead of the contract rate offered on their commitment. This change is scheduled to come into effect on October 17, 2016.
- “Safer Lending”
This means that mortgages insured through portfolio (‘bulk’) insurance must now meet the same criteria as those that are high ratio insured. This change is scheduled to come into effect on November 30, 2016.
- Closing “loopholes” on taxes
This essentially refers to the fact that the capital gains exemption on principal residences should only apply to residents of Canada. There has been discussion around this item for some time. The Provincial Government of British Columbia introduced a 15% Provincial Transfer Tax earlier this year. Given the heated markets of Vancouver and Toronto, this policy is not seen as a big surprise.
In addition there is further discussion about ‘sharing in risk’ that is currently borne in large part by the three mortgage insurers – Canada Mortgage and Housing Corporation, Genworth Financial and Canada Guaranty, . While high ratio and portfolio insurance funders pay for this risk, there is discussion about sharing in the cost of losses beyond just the mortgage insurance companies. This in and of itself could have significant implications.
Reviewing the changes, I have a number of thoughts regarding the broader implications.
First, we need to consider the end customer. More analysis must be completed to fully understand the number of homeowners who had planned to purchase in the next couple of years, but will no longer qualify. It would be worthwhile to also look at the number of Canadian households that have made purchases in the past few years who, under these new guidelines, would not have been able to do so. From what we have gathered, those who already have mortgage insurance policies in place should continue to be qualified on the contract rate going forward (i.e. at renewal).
Although the architect of these new rules, The Department of Finance sets national policies, it needs to be aware of regional consequences. In short, fewer buyers mean less demand for housing, which, in this writer’s humble opinion will certainly have effects on home prices While some may feel that is desirable for certain markets like Vancouver and Toronto, this change will impact home buyers in many other markets across Canada. Some of those markets have had flat or even depressed prices for a number of years, especially hard-hit areas as in the oil patch. Alberta, for example, has seen housing sales continue to slump this year after falling sharply in 2015 because of the drop in oil and gas prices, a new Canada Mortgage and Housing Corp. report shows. Sales through the Multiple Listing Service were down 11 per cent in the first seven months of this year, following a decline of 21 per cent, to 56,477 units in 2015, according to a report released recently. This weakness contributed to a 0.7-per-cent price drop last July compared to July 2015, building on a 2.1-per-cent slump the previous year.
Could all of the above spell a ‘cooling off’ in the two overheated markets of Vancouver and Toronto? Oh for a crystal ball!!! Stay tuned, it’s not over yet!
