Do you feel the chill in the air? It’s not just the autumn weather – the mortgage and housing market is experiencing a cool down following a number of government changes made this month.
October has ushered in plenty of change for Canadian real estate – From the truth about condo foreign investment to teasing hints from the Bank of Canada, here are the highlights from this month’s top headlines.
A New Reason to Stress
The Federal government kicked off the month by announcing two major changes for the housing market in efforts to reduce risky borrowing and discourage excessive foreign investment.
As of October 17, all borrowers taking out high-ratio (less than 20% down) mortgages must pass a mortgage “stress test”, meaning they now need to qualify at the Bank of Canada’s benchmark rate of 4.64%, which is nearly twice as high as the discounted rates currently available. For homebuyers, this means they’ll qualify for less mortgage – by as much as $144,304, according to these calculations. The changes are expected to greatly impact first-time and millennial buyers, who are most likely to pay less down on their home purchase.
No More Tax-Free Rides
In the same announcement, the government stated it is also pulling tax incentives for out-of-country buyers with no intention to dwell in their Canadian real estate. Non-residents who do not reside in Canada the year their home is purchased will no longer be exempt from taxed capital gains when they sell. Previously, anyone claiming a home as a principal residence did not have to pay tax on any value the home may have accumulated – a loophole that was allegedly abused for foreign investors to purchase and sell multiple homes for a profit, a practice that exacerbates Canada’s shortage of affordable homes, and drives prices higher.
The CMHC Sees Red
The Canada Mortgage and Housing Corporation, the nation’s largest taxpayer-backed mortgage insurance provider, warns it will apply the highest risk rating possible to Canada’s market as a whole. It’s the first time the entire nation has been classified as a “red” risk; the CMHC is greatly concerned by unsustainable prices moving beyond urban centres and into smaller markets. According to President and Chief Executive Officer Evan Siddall, too-high housing prices and large levels of household debt make Canada vulnerable to economic downturn.
“CMHC has recently observed spillover effects from Vancouver and Toronto into nearby markets,” he said to the Globe and Mail. “… They will cause us to issue our first ‘red’ warning for the Canadian housing market as a whole.”
CMHC ranks markets on their level of risk, from low, to moderate, to high. In addition to the national prognosis, it also deems Toronto, Vancouver, Regina, Calgary, and Saskatoon as red zones with problematic real estate conditions.
High-Rise Living in High Demand
It’s no secret that detached houses within city limits are out of reach financially for entry-level buyers and families. Rather than migrate to the suburbs, however, the latest numbers show more buyers are turning to condos. The Toronto Real Estate Board (TREB) finds condo sales soared 22.1% year over year in the third quarter, with 8,014 units changing hands. Competitions for units is also growing; listings are down by 13.3%, with prices pushed to an average of $415,636 across the GTA.
“The annual rate of condominium apartment price growth has accelerated over the past year as the supply of units available for sale become more constrained while demand remained strong,” stated President Larry Cerqua in TREB’s report. “Price growth remains well-below those for low-rise home types. Condo apartments continue to be an affordable entry point into homeownership for first-time buyers.”
A Close Call for the Bank of Canada
Canada’s central bank opted to leave its trendsetting Overnight Lending Rate untouched in its October 19 announcement – but it was very nearly a rate cut, according to comments by BoC Governor Stephen Poloz. “Given the downgrade of our outlook, the governing council actively discussed the possibility of adding more monetary stimulus at this time in order to speed up the return of the economy to full capacity,” he stated to reporters. “However, we identified a number of significant uncertainties in the current context that are serving to widen the zone of balance within our risk-management framework.”
He added that the federal mortgage changes offer the BoC more breathing room, as it can now lower rates to stimulate the economy without the worry doing so will encourage risky borrowing and higher household debt levels. “Importantly, the government’s actions to mitigate risks in the mortgage market were not seen as an impediment to easier monetary policy,” he said.
Toronto Rents Soar
Bidding wars aren’t just reserved for home buyers – renters are now facing steep competition for affordable units close to the city core. The TREB rental report finds it is substaintially more expensive to rent in Toronto in the third quarter compared to in 2015, with the average one-bedroom rent up 7.2% to $1,777. Those seeking two bedrooms will need to shell out $2,419 monthly, a 7.9% increase. Rentals are also getting tougher to find, with listings down 4.8% to 9.164 units, compared to 9.629 last year.
A Proposal for the Banks
It would appear the government isn’t quite finished tweaking the housing market this month, releasing a proposal to require Canada’s banks – big and small – to assume between 5 – 10% of losses on insured defaulted mortgages. Currently, banks aren’t exposed to any financial risk from mortgages that aren’t paid; 100% of the costs are backed by taxpayers via CMHC, and private insurers Genworth and Canada Guaranty. Having the banks take on “more skin in the game” would force them to tighten their underwriting and qualification requirements – another way the government is keen to weed out overly-leveraged mortgage borrowers. The proposal is open for public and lender feedback until February 28, 2017.
Foreign Investors a Fraction of Toronto Buyers
The extent of foreign investment in Canada real estate, and its impact on prices, has been hotly debated this fall, following Vancouver’s move to charge a 15% tax surcharge on out-of-country buyers. However, the most recent Toronto numbers reveal concerns in this city may have been over-inflated. Real estate think-tank Urbanation surveyed developers and new condo brokerages on domestic and non-resident homebuyers, and found foreigners account for just 5% of all sales in active development in Toronto. “The results of this very important survey show a rather limited role of foreign buyers in the GTA new condo market and a very significant overall share of domestic investors,” stated Shawn Hildebrand, senior vice president at Urbanation. “These estimates coincide with the percentage of new condos entering the rental market upon completion, indicating the important role domestic investors play in the GTA housing market.”
However, that’s not to say Torontonians feel foreign buyers are a benign presence – in a recent poll conducted by Scarborough-Agincourt councillor Jim Karygiannis, 52% stated they were in favour of introducing a similar Vancouver-style tax in the city. However, Ontario Premier Kathleen Wynne has shut down any immediate speculation, stating such a tax won’t be coming to the province any time soon. “We’re not going to go down the road that British Columbia has gone down,” she stated. “I’m not interested in doing something that would have an unintended consequence in Ontario – something that was designed for a completely different market.”