1. Morneau emerges from his deep dive with a treasure trove of new rules
On Monday, Finance Minister Bill Morneau announced a major shakeup of Canada’s mortgage and foreign-ownership rules for real estate to take effect this fall. There are four big changes involved. Expanding stress tests to all insured mortgages, not just high-ratio mortgages in which the buyer has put down less than 20 per cent of the purchase price. Closing a tax loophole that some foreign buyers have used to claim exemptions in capital-gains tax for selling properties that they falsely claim as their primary residences. Launching consultations to see if banks can take on added lending risks, which would lighten Ottawa’s obligations to pay for insured mortgages in the event of a housing crash. Changing the restrictions on portfolio insurance, a type of bulk insurance for mortgages with down payments of 20 per cent or more.
Some feel Morneau should be applauded for trying to bring a little more sanity to the real estate market. Tightening access to mortgage insurance is a no-brainer because it will encourage more discipline among buyers and lenders. And cracking down on sellers, including foreigners, who duck paying capital-gains tax is long overdue. But don’t expect the measures, announced Monday, to have a dramatic or immediate effect on Canada’s frothy housing market. That’s because the big factors moving the country’s hottest markets are largely beyond its control – rock-bottom interest rates, an influx of Chinese money and a scarcity of single-family houses in cities such as Toronto and Vancouver.
The announcement is as much about being seen to be responding to Canada’s national preoccupation as it is about fixing the problem. Tax professionals said the biggest impact of Finance Minister Bill Morneau’s announcement Monday may be psychological, because when speculators hear the Canadian Finance Minister talking about tough tax measures they think twice about trying to skirt the rules.
Regardless, Canada’s mortgage lenders and the largest private insurer plunged amid concerns that new measures by the federal government to cool the housing market will hurt their businesses. First-time homebuyers may need to lower their expectations under the Liberals’ new mortgage rules. A report by Genworth MI Canada says over one-third of insured mortgages — predominantly borrowed by first-time homebuyers — would have difficultly meeting the requirements. First-time homebuyers, the company said, would have to consider buying cheaper properties or saving for a bigger down payment.
Ottawa’s attempt to cool Canada’s overheating housing market and impose stricter regulations on mortgage lending is also likely to have a profound impact on alternative lenders that compete with the country’s largest banks. The new rules, announced Monday, apply to all residential mortgage lenders.
Nonetheless, Bank of Canada officials are giving a thumbs-up to the Trudeau government’s efforts to cool the country’s debt-fuelled housing market. Bank of Canada Governor Stephen Poloz has more leeway to cut interest rates again if the long recovery from an oil bust falters, now that Finance Minister Bill Morneau has stepped in to tackle a housing boom.
Canada’s largest banks are quietly embracing Ottawa’s new mantra to share some risk in the country’s mortgage system, a fundamental shift that would alter the way the country’s $1.4-trillion mortgage market operates. The head of Canada’s housing agency said banks are getting a free ride in the country’s real estate market, leaving insurers and taxpayers to shoulder all of the risk of a downturn.
Indeed, today’s unprecedented low lending rates have Canadians wondering what will happen when interest rates rise. Canada’s new mortgage rules could have a range of consequences — intended or not. Canada’s finance department projects home sales could fall as much as 8 percent in the first year after new housing regulations are implemented, before rebounding, based on an analysis using historical data. Efforts to cool Canadian home prices could also trickle down to the $440 billion market for debt backed by insured residential mortgages.
Under the new mortgage rules all insured mortgage borrowers must now pass a “stress test” proving that they can carry a mortgage at a realistic rate (the Bank of Canada’s conventional five-year fixed posted rate), and not simply the “teaser” rate offered for a short period by the mortgage lender. Up until now, this stress test only applied to insured mortgages with a variable rate or with terms of less than five years. These tighter rules will reduce the mortgage amount a homeowner can qualify for at the same level of income. One of Canada’s largest mortgage default insurers says about one third of its consumers would have problems meeting the new required debt service ratios unveiled by Ottawa Monday and could ultimately be forced into lower priced houses. Sweeping changes to Canada’s mortgage lending rules could also push more borrowers into the unregulated, shadow banking segment of the market, creating a new pocket of risk in the financial system, industry insiders say.
Former Finance Minister Joe Oliver thinks Ottawa has gone about pitching its new mortgage rules in the wrong way, but he thinks tighter controls will enhance domestic financial stability. Oliver is not the only former finance minister worried about the runaway housing markets in Vancouver and Toronto. Over drinks in Ottawa one evening about four years ago, Jim Flaherty said he was afraid that the Toronto housing boom would become a bubble. The Feds clearly wanted to crack the housing market, and they may have finally done it, with a sledgehammer.
The B.C. and federal governments waited too long to address the out-of-control real-estate prices in Vancouver and Toronto, and the market is pushing out families, says Vancouver Mayor Gregor Robertson. But, Ottawa’s changes to mortgage insurance rules will reverberate far beyond the overheated markets of Toronto and Vancouver, with analysts expecting the stricter requirements to have even greater impacts in parts of the housing market that are already soft.
Unintended consequences of the federal government’s preoccupation with ensuring that the Vancouver and Toronto real estate markets cool down include the fact that Ottawa’s fall sledgehammer will needlessly crack Atlantic nuts. Hundreds of people in Calgary who thought they’d already qualified for a mortgage may have to rethink their plans. Some first-time Winnipeg homebuyers will likely have to settle for less expensive homes. Saskatchewan’s housing market will also be negatively impacted when the federal government makes changes later this month. Renters who’ve been saving up money to buy their first home will be heartbroken by new mortgage rules.
On the plus side though, The introduction of new federal rules governing mortgage won’t prove to be much of a concern for Canadian companies who are looking at hiring foreign talent, according to observers.
2.Maybe these new rules will cool down the insane Toronto Market
Home sales are surging in the Greater Toronto Area while tumbling in the Vancouver region, raising the prospect that a new tax in B.C. has foreign buyers increasingly looking eastward. Housing prices in the Toronto area continue to soar, with the average price in September rising 20.4 per cent to $755,755. The number of sales also jumped 21.5 per cent, according to figures released this morning by the Toronto Real Estate Board. It says there was strong sales growth for all major home types, but a lack of supply limited growth in the City of Toronto itself.
Adjusting for price differences between types of housing, a benchmark price index was up 18 per cent from September 2015. The average sale price for detached houses in Toronto proper rose to $1.29 million, up 23 per cent from a year earlier. The comparable price for detached houses in surrounding areas was $928,414, up 26.6 per cent. New housing measures announced by Finance Minister Bill Morneau earlier this week will do little to address surging home prices in Toronto. Welcome to Toronto, a place where many of us can only dream of one day buying a detached a house within (or even near) the city limits.
In this hot Toronto real estate market where every penny counts, some buyers could find themselves able to borrow significantly less cash than they were previously able to, thanks to new mortgage rules coming into effect in less than two weeks.
As a result, Torontonians are increasingly looking further afield. The Junction, a condo development in Barrie, almost sold out in two days – eight per cent of buyers were from the GTA. Industry watchers also predict Toronto buyers will continue to drive prices up in Waterloo Region’s already red-hot real estate market. Statistics released Wednesday for September home sales in Kitchener and Waterloo indicate that the red-hot market shows no signs of cooling off.
I bet Phil Beecher won’t be moving to Waterloo after selling his Geoffrey St. home for almost $2 million.
3.But it looks like Vancouver is already cool enough
Sales activity in the Vancouver area’s real estate market has slumped amid uncertainty over a new B.C. tax on foreign buyers, as bidding wars dry up for homes that would have attracted multiple offers earlier this year. As property sales plunged in Metro Vancouver last month, Toronto’s increased by more than 21 per cent, according to new figures released Wednesday. Home sales in the Vancouver area fell by 33 per cent in September compared with the same month last year as the market adjusts to the B.C. government’s 15-per-cent tax on foreign buyers, according to data released on Tuesday by the Real Estate Board of Greater Vancouver. The tax took effect on Aug. 2 and one result is said to be an increase in foreign investment in commercial real estate.
The province’s latest data dump regarding the origin of buyers showed that the recent hike in the property transfer tax for foreign nationals had the desired effect of slowing sales to non-locals – but a glance at the big picture shows that the needle has yet to move and listings that some might describe as unreasonable are still easy to find. In fact, the cost of a home in Metro Vancouver is up by nearly 30 per cent over last year. No, Vancouver’s real estate market isn’t crashing – yet at least
Multiple forces are fuelling the Vancouver area’s real estate market, and it is unclear how much impact foreign buyers may be having on prices, according to Canada’s federal housing agency. Low interest rates, robust population and employment growth, limited housing supply and the proximity of protected areas collectively known as the Agricultural Land Reserve are among the reasons real estate in the Vancouver region is so expensive, Canada Mortgage and Housing Corp. said in a report on Thursday.
In other news, the City of Vancouver wants the B.C. government to review the provincial homeowners’ grant program as fewer people qualify for the grant because of rising property assessments. The B.C. Minister Responsible for Housing Rich Coleman plans to close a loophole that allows landlords to avoid rent-control rules. And Airbnb has offered to help B.C. cities regulate and tax vacation rentals.
Outside of Vancouver, Tony Joe, a real estate agent in Victoria, received a predictable earful last spring when he distributed flyers that screamed: “Investors and foreign buyers want your property!” The once-hot real estate market in the Fraser Valley continued to slow last month, with sales dropping below the 10-year average for the first time this year. Meanwhile, the number of residential units sold in Kamloops in September was up 13 per cent over the same month last year.
4. And the entire country might be headed for a U.S. style meltdown
It is always dangerous when governments seek to intervene in the normal functions of markets. The U.S. demonstrated that when ill-considered policies did much to fuel the bubble that burst in 2008. Now Canada’s economy is set to follow the U.S. off a cliff if it holds the same pattern America’s did in the mid-2000s. Canada’s dependence on housing appears to be as stretched as it was in the U.S. back in 2005, and the degree to which new mortgages rely on risky borrowers is equally as troubling, a new report warns.
Macquarie analyst David Doyle, who recently wrote a report warning “Winter is Coming” for the Canadian economy, detailed the ways in which the current domestic housing market resembles the United States just before the crisis. In the six cities that CNBC see as most at risk of a bubble – Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong – house prices have increased by almost 50 percent on average since 2011. In the other financial centers, prices have only risen by less than 15 percent. This gap is out of proportion to differences in local economic growth and inflation rates.
In fairness, the federal government has introduced numerous measures in recent years in efforts to stabilize housing markets. Here’s a quick look at some of them. And, effective Oct 17, all insured mortgage applications will be underwritten using the Bank of Canada’s Mortgage Qualifying Rate (MQR), which was first implemented on April 19, 2010 as an intelligent response to the lessons learned from the U.S. housing crisis
5.The best of the rest
The number of homes sold in Calgary rose for the first time in nearly two years in September, according to the latest data from the Calgary Real Estate Board.
With 1,488 properties sold, overall home sales were up nearly 2.1 per cent from September 2015 levels, snapping a 21-month streak of year-over-year declines.
Ottawa’s housing market showed no signs of losing steam last month as some 1,371 local homes changed hands last month. While fall sales traditionally dip slightly after the busy summer season, it’s a 22.5 per cent jump over September 2015. Year-to-date sales are up seven per cent over the same period last year.
Real estate records continued to fall in Winnipeg last month, where 1,216 properties valued at a combined $336 million changed hands in September — both record highs for the month. The number of sales was up 6% from the same month last year, while the dollar amount was up 9%.
With those numbers in mind, CBC News in Toronto went house hunting online to see what $1.29 million would buy across Canada. The amount is the average sale price of a detached home in Toronto.
And, in closing – for those who appreciate irony- Hangzhou, a city in eastern China, has introduced measures to cool the housing market.
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Gavin is a media relations consultant and news junkie based out of Collingwood, Ontario.