New Mortgage Rules To Be Announced By End of Month
New mortgage rules that will tighten qualification criteria for more borrowers are confirmed to be finalized by the end of October, and will go into effect within two to three months, the banking regulator has announced
Referred to as B-20 and B-21, the changes will require all mortgage applicants to qualify at a higher rate than that of their actual mortgage, most likely a 2-per-cent threshold. Currently, only borrowers who pay less than 20 per cent down on their homes must be stress tested at the Bank of Canada’s current benchmark rate of 2.84 per cent. Co-lending mortgage arrangements, which allow one borrower to piggyback on another with more equity, will also be banned.
The changes are to offset the risk of highly indebted households, made worse by rising real estate prices in Canada’s biggest markets says OSFI head Jeremy Rudin. “We are not wanting to see those risks crystallize in rising arrears and defaults before we act,” he said to an audience at the Economic Club of Canada.
The pending changes have prompted calls for caution from various corners of the housing industry, as a number of tweaks have already been made to chill the market. It’s feared too much has been introduced too soon, which could have unintended consequences for buyers. Tim Hudak, President of the Ontario Real Estate Association, called it an outright “war on home buyers”, while the Canadian Builders Association has warned scaling back the market could mean a downturn in industry jobs.
GTA Home Sales Down 35% From Last Year
The latest numbers from the Toronto Real Estate Board show the current state of the housing market is still drastically below last year’s activity – but that’s not necessarily a bad thing, as it ushers in balanced conditions and greater choice for buyers.
Overall home sales continue to lag by double digits compared to last year, with 6,379 homes changing hands – a 35-per-cent decrease from September 2016. However, they were relatively flat month over month at an increase of 0.3 per cent, indicating that the rapid cool down triggered by the Fair Housing Plan in May is moderating. The average price across all home types increased 2.6 per cent year over year and 5.9 per cent from August, to $775,546.
It’s no secret that real estate is expensive in Canada – but a new report from RBC finds buying a home hasn’t been this unaffordable since the 90s.
The lender’s Housing Trends and Affordability Reportreveals the national aggregate affordability measure – which RBC calculates using housing costs as a share of household income – rose to 46.7 per cent in the second quarter. That’s a 27-year high, and the eighth consecutive quarter of affordability deterioration.
Not surprisingly, Toronto saw the greatest increase in unaffordability, with the city’s index hitting 75.4 per cent, up from 71.1 per cent just one quarter ago. Craig Wright, senior vice president and chief economist at RBC, says this is despite the implementation of the Ontario Fair Housing Plan, which was introduced to calm market conditions in the Golden Horseshoe. Sales have fallen dramatically since the rules were put in place, but that hasn’t yet translated to improved affordability, he says.
“Once again, the Toronto area played a big role in shifting up the national affordability needle in Q2. While Ontario’s Fair Housing Plan did cause a reaction on part of buyers and sellers in April, the impact on prices wasn’t felt immediately,” he states. “In the end, any evidence of price mediation in the Toronto region emerged too late to make a difference in the second quarter.”
Vancouver continues to be the least affordable real estate market in Canada, with an index of 80.7 per cent. This indicates prices are rebounding in the west coast city after slight softening over the past two quarters as a result of the Foreign Buyer’s Tax.
RBC also warns that rising interest rates are a contributing factor in unaffordability, and will continue to be for the foreseeable future.
“Rising interest rates could have significant implications for housing affordability nationwide. After back-to-back increases to interest rates in June and September, there are indications that the Bank of Canada will likely make one more before the year’s end and three more times in 2018 for a total increase of 100 basis points,” says Wright. “We estimate that this potentially could lift the RBC aggregate affordability measure up by a further 3.5 per cent nationwide, although other factors, such as income gains, would have a mitigating effect.”
Saving for Down Payment Main Reason Millennials Remain at Home
The millennial who won’t leave the family nest, occupying the basement and relying on mom to do laundry, is a growing stereotype, but a recent report debunks the myth that young adults are lazy or financially incompetent. A University of Waterloo survey that polled 700 Canadians on why they remain home finds the main motivation is the opportunity to save, especially for a home down payment of their own.
A full 79.2 per cent of millennials cited saving as their reason for remaining in the family home, while 42.1 per cent point to extremely high rents in the cities where they work. The average one-bedroom rent price recently exceeded $2,000 in Toronto, while vacancies are at a record low.
Other reasons included the succinct “I want to” (34.6 per cent), paying off debt (32.4 per cent), looking for work (25.1 per cent), other (19.3 per cent), and caregiving (12.1 per cent).
According to 2016 Census numbers, nearly half of all millennials in Toronto remain living with their parents.
Hefner Leaves Crystal Harris Lavish LA Home
Crystal Harris, widow to late Playboy founder Hugh Hefner, may have been left out of his reportedly US$43-million will – but the controversial media mogul has left her a foothold in the Los Angeles real estate market.
It’s reported that Hefner purchased the US$7 million home for Harris, who he married in 2012 and is 60 years his junior, as part of a prenup in 2013. Nestled in the LA hills, this 5,900-square-foot modern home has four bedrooms, five bathrooms, a huge infinity pool, cinema room, gourmet kitchen, games room, and massive floor-to-ceiling windows that let in panoramic LA views. Sounds like the perfect pad for Harris to throw a legendary party or two of her own.
CMHC Considers Easier Mortgage Rules for Self-Employed, Immigrants
There may be some good news to come for entrepreneurs or newcomers to Canada who wish to buy a home. The Canada Mortgage and Housing Corporation, Canada’s largest mortgage default insurance provider, which also sets the premiums and qualification criteria for mortgage insurance, announced it is considering alleviating some of the income and credit requirements for self-employed and immigrant borrowers.
Both of these borrower groups have a tougher time qualifying for a mortgage under current rules, as they often don’t have the income verification or credit history required by most lenders.
For example, a self-employed borrower who cannot produce proof of regular income from an employer must provide two years’ worth of income and tax statements to ensure they’ll have the financial means to carry their mortgage.
Lack of long-term employment can also be a challenge for immigrants, who also face the hurdle of building a Canadian credit history before being considered as a prime borrower by lenders.
Critics have long called the qualification processes out of touch, as traditional employment situations have evolved and banks shouldn’t just cater to those with a nine-to-five gig.
“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians because they can’t do that,” said Evan Siddall, CMHC CEO to the Canadian Press. “It discriminates against entrepreneurs as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs.”
Vancouver’s Missing Middle Cramps Affordability
The abundance of oversize homes in Metro Vancouver just isn’t a fit for its population’s needs, according to research from local University of British Columbia sociology professor Nathaneal Lauster. One of the biggest challenges facing affordability in the city is its lack of “just right” housing stock – it has a large number of pricy, single family homes, lower market condos, and not much in between. In fact, Vancouver has a greater proportion of homes with five or more bedrooms than Toronto or Montreal.
“We’ve got way more mansions than any other metropolitan area in Canada,” Lauster said to the Vancouver Sun. “The reason for that is a lot of our land is set aside for single-family homes.” Over 80 per cent of Metro Vancouver neighbourhoods are zoned for single-family use.
The scarcity of a “missing middle” – townhouses, stacked townhouses, and other low-rise, higher density developments – means families have limited affordability options.
To outline the disparity of utilized space across the city, Lauster points to Statistics Canada data that finds 459,994 bedrooms are empty across the region, with one fifth in “super-sized” homes.
CMHC Looks to Airbnb as Affordable Rent Ally
In the quest to improve the supply of affordable rental housing, the CMHC is looking to an unconventional collaborator: Airbnb, the popular – and somewhat controversial – online platform for short term rentals, as well as Vacation Rental By Owner (VRBO).
The Crown Corporation says it has reached out to the company to discuss the various ways the two could work together, perhaps by converting some short-term listings into longer-term postings. However, the prospect of the entities teaming up is still very premature, says CMHC CEO Evan Siddall.
“I think VRBO and Airbnb should get ahead of this, because they could be giving us some social utility by helping us spawn supply,” he told the Canadian Press.
Rental vacancy is 3.7 per cent nationally, but is far lower in city centres like Toronto (where it is a mere 1 per cent), and Vancouver (0.7 per cent). Purpose-built rental projects are also rarely greenlit by developers, as condo developments prove more profitable.
Condos Continue to Drive Vancouver Demand
Overall sales and prices are on an uptick in the Vancouver region, but condos continue to be the highest-sought housing type, while detached homes – still priced out of many Vancouverite’s income range – see only moderate growth.
There was a total of 2,821 sales last month, a 25.2-per-cent increase year over year, and down 7.3 per cent from August. However, activity remains 13.1 per cent above the 10-year average.
Jill Oudil, President of the Real Estate Board of Greater Vancouver, says the board’s latest data shows the market is splitting into two very distinct directions.
“Our detached homes market is balanced today, while apartment and townhome sales remain in seller’s market territory,” she says. “If you’re looking to enter the market as either a buyer or seller, it’s important to understand these trends and use this information to set realistic expectations.”
REBGV reports 852 detached homes exchanged hands in September – a 27 per cent increase from last year, but down 33 per cent from 2015, reflecting how Vancouver’s luxury market has fluctuated following the implementation of its foreign buyer tax. The average detached home price is $1,617,300, sitting on the market for an average of 42 days.
By contrast, 2,401 condos and 1,226 townhouses were sold, at the average price of $635,300 and $786,600, respectively.
The market also saw a flood of new inventory last month, with 26.6 per cent more homes listed for sale than in August. A significant portion of those are in the detached segment says Oudil. “Detached homes made up 30 per cent of all sales in September and represented 62 per cent of all homes listed for sale on the MLS. This dynamic has slowed the pace of upward pressure that we’ve seen on detached home prices in our market over the last few years.”
Penelope Graham is the Managing Editor at Zoocasa, and has over a decade of experience covering real estate, mortgage, and personal finance topics. Her commentary on the housing market is frequently featured on both national and local media outlets including BNN Bloomberg, CBC, The Toronto Star, National Post, and The Huffington Post. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods, travelling abroad, or in the dance studio.