The Canadian real estate market has been a topic of debate over the last year. With Vancouver and Toronto residential property markets continuing to be on an upward trend, the government introduced mortgage rules to cool things down.
Remaining current on the complexities of the markets and the resulting change to the regulatory environment in which they operate is critical for investors in the GTA (Greater Toronto Area) and other Canadian housing markets.
So what do the new rules look like and how will they affect first-time buyers and investors? The mortgage rules came into effect October 17 and reduced 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 payments are 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.
Pressure on prices
Buyers in markets such as Vancouver and Toronto — higher priced markets — will feel the impact of this change more so than others because there are more higher end properties. 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. Foreign buyers will also be impacted by the 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), and 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 Canada is an attractive option for investment dollars. Toronto’s 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 a clear opportunity for those looking to allocate on their investment property.
Full impact of rules
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 rules will not be apparent for some months. We will need to keep careful watch on how home buyers and international real estate 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 on the Toronto market to provide the most recent information.
The writer is Director at Buttonwood Property Management.