1. Mortgage Rules Take Effect
New rules aimed at making it harder to get a mortgage take effect this week, a move that is bound to have an impact on demand for homes in Canada. Earlier this month, Ottawa announced the moves, which boil down to a stress test for all insured mortgage applications. It consists of testing to determine if a borrower could afford to pay back a loan if the rate rises, so they judge the borrower against the five-year standard rate of 4.64 per cent — even though many lenders are currently offering mortgages at far less than that. The government says the rules, which apply to any buyer putting less than 20 per cent down, are intended to reign-in household debt and cool inflated real estate markets. The federal government is hoping to keep Canadians out of unaffordable debt. The new federal rules will cut into the purchasing power of some first-time homebuyers and they could make things tougher for those folks to get into the market. The other change announced by the government limits the foreign money going into the Canadian real-estate market by closing a “loop hole” that was allowing non residents to purchase a “home” in Canada. It exempted the property from taxable capital gains upon its sale by deeming it their residence. And after sowing confusion with its housing reforms, Ottawa has provided more guidance about which buyers will be exempt from the stricter mortgage requirements.
Here’s a guide on what has happened so far, what it means and what’s next.
The new measures are an effort to cool the red-hot housing markets in Vancouver and Toronto. They are Canada’s two hottest housing markets, and even some in the real industry don’t question the need to cool prices in both Toronto and Vancouver, but that opinion changes once you get beyond the orbit of those two cities. The effects will be felt everywhere, from Kamloops, to New Brunswick, while also hitting places like Saskatoon and Winnipeg quite hard. A real estate expert believes the new mortgage rules that went into effect Monday will hit Alberta’s market the hardest. The federal government’s new mortgage rules for lending may also have a negative impact on the Atlantic Canada market, according to real estate experts.
To what extent forthcoming tax and mortgage measures actually end up cooling the Canadian housing market is anybody’s guess. The Bank of Canada backed the rules on Wednesday, saying that, “over time,” they will reduce the risk of Canada’s financial system becoming unstable. Some in the real estate industry are expecting little change, others predict a drastic decline. The changes to mortgage lending rules have injected uncertainty into the real estate market and could deter first-time homebuyers, the president of the Canadian Real Estate Association said Friday. One by one, the list of critics is growing. Amid all this hating, one group has been notably silent – Canada’s big banks. And there’s a particularly good reason why: They largely approve of the crackdown. The Royal Bank of Canada also suggests the impact will be substantial. But The former head of Canada’s largest bank says new mortgage rules aimed at cooling hot housing markets are “reasonable” but says fears of a housing crash are overblown. Other economists don’t believe the Canadian government’s new housing market rules will spark a meltdown, but they do expect the measures will “harden” the landing. But the chief economist for Mortgage Professionals Canada (MPC), which represents mortgage brokers across the country, says the economy could see higher rents and as many as 50,000 fewer jobs as a result of new lending rules that came into effect on Monday.
The changes are, however, expected to have a significant impact on the country’s mortgage industry, either helping fuel the growth in private, unregulated lending or causing a shakeout in that sector, with potentially problematic ripple effects. For instance, alternative lender Home Capital Group Inc. said Thursday that new federal government mortgage rules could take a 60 per cent bite out of its insured mortgage business. The Canadian Mortgage Brokers Association has spoken directly to Finance Minister Bill Morneau and has provided its recommended amendments and exceptions for the recent mortgage rule changes. Canadian mortgage brokers also say they saw a flurry of borrowers trying to pre-empt new federal rules that will reduce the purchasing power of some first-time homebuyers. One Vancouver mortgage broker reports business was up 30 per cent ahead of the new mortgage rules coming into effect, but he expects a major slowdown in the coming months. But borrowers shouldn’t be put off by a new ‘stress test’ about to be introduced for new prospective homeowners, says another Vancouver mortgage broker. The changes to Canada’s mortgage rules came as a shock to a Windsor mortgage agent, who says some homebuyers no longer qualify.
Meanwhile, a Toronto financial planner says the new mortgage rules will likely mean many millennials will have to raise infants in apartments. But not the
“bully” who was preparing to muscle out the competition for a charming three-bedroom house in Toronto’s east end just hours before tighter rules governing Canadian real estate came into effect says
How’s your confidence in housing holding up? To find out how people are feeling, Rob Carrick asked members of his Facebook personal finance community to rank their anxiety about housing on a scale of one (not worried at all) to 10 (very afraid). At one extreme, someone described their anxiety level at 11 for the Greater Toronto Area. Another person pegged her level at just one “because we sold and are now renting…” Still another said he’s not as concerned as he was when mortgage rates hit 18 per cent back in the early 1980s.
2. Bank of Canada holds steady on interest rates
The Bank of Canada held the interest rate at 0.5 per cent Wednesday but cut its economic forecasts through 2018, predicting a slower housing market and conceding the export sector is not rebounding the way it anticipated. The central bank now expects the economy to grow by 1.1 per cent in 2016, down from the 1.3 per cent forecast in its July Monetary Policy Report, largely due to weaker-than-expected U.S. activity in the first half of the year. Gross domestic product growth is expected to pick up to 2 per cent in 2017 and 2.1 per cent in 2018. The bank now expects the Canadian economy to return to full capacity by mid-2018, about six months later than it had previously expected.
The market is now assigning a roughly one-in-five chance of an interest rate cut by the Bank of Canada by January, and odds of one-in-four by spring 2017.That’s up from near zero before the central bank’s policy announcement on Wednesday. The head of Canada’s central bank acknowledged that policymakers came close to the tipping point on Wednesday’s interest rate decision. In the end, they chose not to lower the key lending level because the “balance of risks” was still tilted toward uncertainty in the economy.
Policy makers have been hoping a weaker Canadian dollar would boost foreign demand, but export data this year has disappointed. The Canadian dollar had an interesting day yesterday, to say the least. Initially it rallied on the back of stronger oil prices and as the Bank of Canada decided to keep interest rates unchanged. However, despite oil prices extending their gains on the back of a sharper-than-expected US crude inventory reduction, the Canadian dollar slumped as the BoC Governor, Stephen Poloz, said the central bank “actively” discussed the prospects of adding more stimulus into the economy. Thursday, the Canadian dollar weakened to a nearly 1-week low against its U.S. counterpart as investors weighed the Bank of Canada’s more dovish tone.
Pattie Lovett Reid of CTV news understands why some might think it’s a good idea to raise rates, but what does Jim Pattison think? He probably knows the decision we make today can have unforeseen ramifications in our future. Take the recent article in the National Post titled “Canadians are just $200 away from being overwhelmed by debt, new survey finds.” The study conducted by MNP found that 31 per cent of Canadians they surveyed are not paying their bills on time.
3. CMHC waving red flag, but not for long?
Canada Mortgage and Housing Corp. has a pretty poor track record when it comes to market prediction, but it’s still cause for serious concern when the agency issues its first ever “red” warning for Canada’s national housing market. Canada’s housing agency is raising the alarm over the country’s real estate sector, warning about a strong risk of problems on the horizon. Canada Mortgage and Housing Corp. will increase the risk rating in its overall assessment of the country’s residential market to “strong” from “moderate” when it issues a new report on Oct. 26. “CMHC has recently observed spillover effects from Vancouver and Toronto into nearby markets,” CMHC chief executive officer Evan Siddall said in an opinion column in The Globe and Mail. “These factors will be reflected in our forthcoming Housing Market Assessment on Oct. 26. They will cause us to issue our first ’red’ warning for the Canadian housing market as a whole.” Siddall’s comments came the same day new mortgage rules introduced by Ottawa took effect.
Meanwhile, a Conservative Member of Parliament, running for leader of the party, is pointing the finger at Canada Mortgage and Housing Corp. for inflated real estate prices in some Canadian cities. Michael Chong is calling for CMHC and its securitization business, which provides mortgage default insurance backed by the federal government, to be privatized — something former finance minister Jim Flaherty once mused about.
4. More news coming in about latest housing numbers
Sales of existing homes in Canada rose in September, ending four months of declines, while average prices continued to climb largely due to activity in Vancouver, British Columbia and Toronto-area markets, the Canadian Real Estate Association said Friday. The average price of a Canadian home increased by 9.5 per cent to $474,590 in September compared to the same month last year. The industry group, which represents realtors across the country, said existing-home sales rose 0.8% month-over-month in September. Sales in two of Canada’s most closely watched areas were mixed, with Vancouver sales down 2.1% and Toronto activity up 3.8%.
In local news, London-area housing starts in the first nine months of 2016 have already surpassed total annual housing starts for every year since 2008. The Oshawa area is seeing a downward trend in housing starts. And, according to the just-released results of a recent survey conducted by real estate brokerage TheRedPin, major intersections play host to the costliest condominium units in downtown Toronto.
5. Getting Moody about housing in Canada
Forget all the housing crash talk says a new report that suggests prices acceleration in Canada’s housing market will slow down without any hard landing. Moody’s Analytics, which used the Brookfield RPS house price index for its models, maintains that prices in Canada will slow down as some markets, especially Vancouver and Toronto, see homes become overvalued and less affordable while international capital inflows slow down. “We are predicting that the housing market will slow down, in terms of house price growth, significantly,” said Andrew Carbacho-Burgos, an economist with Moody’s Analytics who suggests national house price growth will drop to about two per cent by the end of 2018, from about eight per cent now. “We definitely expect a cooling off led by Vancouver and Toronto.” Moody’s also thinks Barrie, Ont., might just be the place to be.
6. Renters feeling particularly moody in Vancouver and Toronto
Canada’s affordable housing crisis is escalating. Currently, 40 per cent of renters across the country spend more than 30 per cent of their before-tax income on rent and utilities, putting them at risk of being homeless. Meanwhile, as 1.5 million Canadians struggle to find safe, affordable housing, population growth and the costs of home ownership continue to rise in key cities, causing a shortage of permanent and stable rental supply. But, recent data out of what was one of Canada’s hottest housing markets, Vancouver, indicates that the party could now be over. Still, for many young professionals chasing the dream of home ownership, “I’ll be renting forever” is a common lament.
As governments manoeuvre to battle the affordability crisis in and around Vancouver, social and non-profit housing projects are emerging as key tools in their arsenals. In the past two months, the province announced $500 million in funding for affordable housing and the City of Vancouver vowed to build 650 below-market rental homes on municipal land
Meanwhile, Toronto’s rental market is the hottest it has been in years, with bidding wars breaking out and rents soaring, according to a new study that predicts Ottawa’s new stricter mortgage qualification will make the region’s rental market even less affordable. The average monthly rent for a condominium in the Greater Toronto Area rose an annualized 9 per cent in the third quarter, to $1,986.
A Toronto group pushing for the regulation of short-term, Airbnb-style rentals is welcoming a city staff proposal to evaluate the impacts of the rentals and consider what kind of restrictions should be imposed on the booming business. In a report to go before the executive committee next week, city bureaucrats say Airbnb rentals in Toronto doubled from 2014 to 2015, with 9,460 rooms or entire units rented via the site that year at least once.
Any why not? In 50 years, the city of Toronto has morphed from a pursed-lip Presbyterian small potato into a cosmopolitan world power, a place of self-assured swagger and culture and diversity and lucre where newly built detached homes have become a scarce commodity. So maybe moving to Mississauga is a cheaper option?
7. The best of the rest
The Canada Revenue Agency’s crackdown on tax fraud in the overheated real estate markets of Ontario and British Columbia is bearing fruit, with auditors recovering $240-million in unpaid taxes and $12.5-million in additional penalties over the past 18 months, new figures show.
Challenging times may be ahead for all types of real estate, not just housing.
Real Estate Investment Trusts, most of which hold commercial properties, have been a stalwart in the portfolio of income-seeking investors for years now. The federal government has introduced several measures to cool the residential market, and now commercial real estate is facing headwinds. Real estate remains a core long-term financial asset, but it’s time for all investors to re-visit their holdings to see if they’re overly exposed.
Speaking of overly exposed… A group of powerful Chinese business leaders set off on an eight-day Canadian tour Sunday that will connect them with Canada’s corporate and political elite, including Prime Minister Justin Trudeau. One of China’s top real estate moguls says his customers are troubled by British Columbia’s tax on foreigners purchasing homes in Vancouver and he intends to raise the matter with Prime Minister Justin Trudeau.
Many of these foreign buyers, scared off by a 15 per cent tax that only applies to them, appear to be making their way to Toronto, according to a new report. Nor surprisingly then, two Ontario real estate associations have voiced opposition to following in Vancouver’s footsteps and implementing a tax on foreign homebuyers, saying that such a “knee-jerk reaction” could have negative implications for the economy.
Perhaps these investors can instead explore a new investment platform aimed at fostering sustainable and responsible foreign investment in Canada outside the real estate sector launches today. Foregrowth.com, operated by Privest Wealth Management Inc., is designed to connect Canadian businesses to affluent investors in China and Canada. Maybe they can connect with Jason Smith. He is at the helm of Real Matters, which facilitates mortgage appraisals, insurance inspections and title searches. The company developed a platform that, for a fee, connects lenders to a network of appraisers and other professionals. Or perhaps they want to invest in Zoocasa, an online real-estate brokerage shuttered by Rogers Communications Inc. last year. It is relaunching with a new website and an injection of cash from a group of technology-focused investors. Zoocasa is set to announce Tuesday that it has raised $1.35-million in seed money from a group of investors that includes Wind Mobile founder Globalive Capital Inc., Hedgewood Inc. and Impression Ventures, whose backers include Franco-Nevada Corp. chairman Pierre Lassonde.
And finally, some real estate agents may be bending their industry’s advertising rules in order to quickly sell homes in Toronto’s booming housing market, according to Toronto realtors. Tired of real estate agents who break the rules? Talk to Amit Haller. He is living the American dream. He sold his startup for $42 million in 2006 and became a Bay Area real-estate tycoon. Now he has launched another tech startup taking on the real-estate industry with a new way to buy and sell homes — entirely though an app. The new company, Reali, came from the experience he and his business partner, Ami Avrahami, had as real-estate investors.
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Gavin is a media relations consultant and news junkie based out of Collingwood, Ontario.