State of the Union When it Comes to New Mortgage Changes

05 October 2016

The Federal Government continues to tinker with mortgage rules that it can control in an attempt to slow down real estate markets, particularly in Vancouver and Toronto.

The first change, to remove the Principal Residence Exemption, for non-residents described as closing a tax loop hole is a nothing. Revenue Canada has never defined a Principal Residence and so non-residents claimed it. Think, how can a non-residenct have a principal residence in Canada? Impossible! But that is what you get from bureaucracy. Almost all non-residents buying property in Canada never considered this a factor in buying. Neither should you when advising clients.

The second change, making BOTH high ratio and conventional (under 80% loan to value) borrowers qualify under the Posted Rate instead of the fixed five year rate of their mortgage will reduce the amount of money that people can borrow. The Posted Rate is the average posted rate of the six big banks which is always higher than rates one can obtain from them.

To advise your clients you need to know these facts. Fifteen years ago, high ratio mortgages were 60% of the market. Today that percentage is 25-30%. That means conventional mortgages make up 70-75% of the total mortgage market. Qualifying for the posted rate ONLY applies to those mortgages that are insured by CMHC through its Canadian Mortgage Bond program and with two smaller companies, Genworth and Canadian  Guaranty. That is high ratio mortgages and a small amount of conventional mortgages. For a major bank, they currently insure only 5-10% of their conventional mortgages. The rest they hold on their books or sell to pension funds. The big impact will be with monoline lenders such as First National, etc. They have to place all their mortgages through the Bond program. If a mortgage is not insured then the lender does not have to follow CMHC rules. In the long term, there will be fewer lenders in the market place and banks will be able to raise interest rates. There will also be more private lenders (shadow banking) who do not have to follow any of these rules.

For first time buyers and high ratio buyers, they will only be able to afford cheaper properties. Prices will not fall because most owners do not have to sell if they do not get their price. What will happen is that more and more buyers will have to lower their sights and settle for some type of condo housing in Toronto. And if buyers cannot transition to this, they will become renters. Smaller (cheaper) condo units will become more valuable.

What does this mean to agents and the market?

First rental property mortgages were never insured and borrowers had to put down at least 20%. The market for rental investors just got a lot better. There will be even more renters going forward. Higher prices and higher rents for small condo units under 700 sf. People who need only conventional mortgages and who can show legitimate income will have better opportunities to buy properties under one million.

So where do you as agents focus? Investors, buyers who need only conventional mortgages and buyers who are prepared to live in something under $400,000. So find those people. For sellers, they will not see any drop in prices but their properties will take longer to sell.

Finally markets hate uncertainty. These changes come into effect on October 17 and we expect that buyers will pause to assess the situation and hope for a price correction. When it does not happen, the market will resume. There will be fewer buyers and more renters but we will still have a healthy market. We expect this slowdown to be 30-90 days.