The Canadian real estate market has been a topic of hot debate over the last year. With Vancouver and Toronto residential property markets continue to be on an unphased upward trend, the Canadian government introduced new mortgage rules to cool things down.

Remaining up-to-date on the complexities of the property market and the resulting change to the regulatory environment in which the market operates is critical to success for investors in the Greater Toronto Area and other Canadian housing markets.

So what do the new rules look like and how will they affect first time-home buyers or investors? They came into effect October 17 and will reduce the purchasing power of both groups. Wider use of stress testing represents a significant change to borrowing requirements.

Prior to the change, stress testing was only used in certain market segments. In an attempt to ensure that loan payments would not be jeopardised by rising interest rates or changing financial circumstance on the part of the borrower, the government is now requiring stress testing on all insured mortgages. Insurance is required for mortgages where down payment is less than 20 per cent of the purchase price.

Additional stress testing will thus add the additional burden of proving financial stability in the face of changing economic conditions. Buyers in markets such as Vancouver and Toronto, the higher priced markets, will feel the impact of this change more so than others.

Upward pressure

Foreign buyers will be impacted by the elimination of the ability to claim tax exemptions on the subsequent sale of a purchased home. By lowering the return on the sale of an investment property, the government hopes to curb upward pressure on prices attributed to foreign investment.

Such buyers will also be impacted by the government’s new limitations on insurance provision. Insurance will now be provided for mortgages of 25 years or less, on houses below $1 million (Dh3.67 million), for buyers with a credit score of 600 or higher.

Additionally, the house must be occupied by the owner. In essence the government is reducing exposure to mortgages of $1 million and higher; a segment of the market where foreign investment is driving a higher portion of demand.

While these new rules are indicative of a government that is looking to cool housing markets, we still feel that Canadian housing market is an attractive option for investment dollars. Toronto housing sales over the month of October continued to rise to record levels pushing prices up by 21 per cent — there thus continues to be clear opportunity for those looking to allocate their investment property.

Careful watch

The new mortgage rules also represent reduced risk at the macroeconomic level and increased quality of credit across accumulated debt meaning investors can be more confident in Canadian credit markets over the longer term.

The full impact of the new mortgage rules will not be apparent for some months. We will need to keep careful watch on how home buyers and international investors reallocate their dollars and how that will impact housing prices, particularly in high value markets like Toronto. It will also be interesting to see the impact to the alternative lender market as they move to fill the gap left by the big banks.

Toronto Dominion Bank recently increased its prime mortgage rate 0.15 points to 2.85 per cent. With the remainder of the big banks likely to follow suit, we will be keeping a close eye.

The writer is Director at Buttonwood Property Management.