Friday, October 7, 2016

Great Article from the Globe and Mail about recent goverment and mortgage changes introduced and my take on it

The federal government is throwing some cold water on Canada’s overheated housing market, hoping to keep Canadians out of unaffordable debt and slow down foreign investment in Toronto and Vancouver’s real-estate markets. Here’s a guide on what has happened so far, what it means and what’s next

What’s changing?

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

1. 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. This may make it harder for some buyers to get insured mortgages, even if they make a larger down payment, because it ends a two-tier system where some mortgages were weighed differently against the buyer’s income to see whether the mortgage is affordable.

2. 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. Now, home buyers must file taxes in Canada, as a resident, the same year they buy a home, before they can later claim the principal residence exemption on any gains for that year.

3.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 – but could also lead to higher mortgage rates. (Here’s David Berman’s analysis, for subscribers, on how bankers feel about this.)

4.Changing the restrictions on portfolio insurance, a type of bulk insurance for mortgages with down payments of 20 per cent or more.

Why are they doing this?

To crack down on foreign real-estate speculation: Investigations by The Globe and Mail over the past year have also shed light on how local and foreign buyers have been flipping Vancouver-area homes for profit, buying and selling properties in the names of relatives or corporations and collecting tax windfalls in the process. In B.C., fears of wealthy foreign buyers inflating Vancouver’s sky-high housing prices have led to tougher restrictions on how the market is regulated and taxed provincially (more on this below); now Ottawa is hoping to close the federal tax loopholes too, a move met with cautious optimism on Monday by the B.C. government.

To keep Canadians out of debt: Mr. Morneau hopes that applying the same stress test to all high-ratio mortgages will make prospective home buyers think twice about taking on more debt than they can pay for. “We want to ensure that we have measures in place to help them to take on risks that they can afford, especially in the situation where mortgage rates go up or their family income goes down,” Mr. Morneau said in an interview with The Globe.

To keep Ottawa off the hook: The federal government currently assumes the full cost of insured mortgages in the event of defaults. Mr. Morneau’s changes would mean Ottawa would pay less, and banks might pay more – costs that the banks might pass on to homeowners by raising rates. The changes to low-ratio mortgage insurance would put the government in less risk in markets with lots of residential mortgages worth $1-million or more, such as Vancouver and Toronto.

What have provinces been doing?

B.C. Premier Christy Clark speaks in Vancouver on June 29, 2016.
The federal government is part of a task force along with the B.C. and Ontario governments that is looking at housing prices in the Toronto and Vancouver areas. Here’s what those provinces have been up to in their own jurisdictions:
British Columbia: This summer, Premier Christy Clark’s government began more rigorous tracking of home buyers’ nationalities and instituted a 15-per-cent tax on home purchases in Metro Vancouver that involve foreigners. The number of foreign-involved transactions plummeted once the tax took effect on Aug. 2; more Vancouver housing numbers released on Tuesday showed a further drop in property sales in September.

Ontario: Premier Kathleen Wynne says the province needs more information about the factors behind Toronto’s red-hot real estate market before adopting a foreign-buyer tax like B.C.’s.

What else has Ottawa already done?

The federal government’s most recent measures come after years of fine-tuning Canada’s housing laws in the aftermath of the 2008-09 financial crisis. Here’s what Justin Trudeau’s Liberal government and the Harper Conservatives before it have already done so far:
Feb. 15, 2016: The minimum down payment for new government-backed insured mortgages increases from 5 per cent to 10 per cent for the portion of a house price over $500,000.

July 9, 2012: The maximum amortization period for new government-backed insured mortgages drops to 25 years from 30 years. Ottawa lowers the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent and stops offering insurance on mortgages for homes worth more than $1-million, instead requiring borrowers for such homes to make a minimum down payment of 20 per cent.

April 18, 2011: Ottawa withdraws government insurance backing on lines of credit secured by homes, such as home equity lines of credit.
March 18, 2011: The maximum amortization period for government-backed insured mortgages is cut to 30 years from 35 years and the maximum amount Canadians can borrow in refinancing their mortgages is reduced to 85 per cent from 90 per cent of the value of their homes.

April 19, 2010: Ottawa introduces a requirement that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. The government also lowers the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes and requires a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties bought for speculation.

Oct. 15, 2008: The maximum amortization period for new government-backed mortgages is fixed at 35 years and a requirement for a minimum down payment of 5 per cent is introduced. Ottawa also establishes a consistent minimum credit-score requirement and introduces new loan documentation standards.

What happens next?

Here are some important dates to watch out for as the changes come into effect:
  • Oct. 17: The new stress-test rules come into effect for borrowers.
  • Nov. 30: The new rules for low-ratio mortgages come into effect.
  • April 30: For most Canadians, this is the deadline day for filing taxes. The new housing rules affect when you have to declare the sale of your home to the government.
The above comments and info provided by the Globe and Mail

Will this actually work?

I guess that remains to be seen in the coming months. My take on this is that Ottawa has been pressured recently to do something about rising house prices and has acted prematurely before assessing the risks and consequences on the economy. I get that rising house prices are a concern. They are a concern for me and my business as well. But rising house prices are a direct outcome of a continued low interest rate policy and a supply and demand issue in the Toronto markets. If Ottawa is concerned about cooling off the market why not address these two factors directly. Why not give builders and developers incentives to build more homes? Why not make it easier to sever large lots in the city and create more homes within the city boundaries? Why not make it easier to change commercially zoned properties which have large parcels of land in order to make them residential sub divisions in order to create more housing within the city? Why not look at the Bank of Canadas interest policy and make changes on that front? 

Instead Ottawa throws a monkey wrench into the equation which of course is driven by a tax revenue generating policy on foreign investors as well as making it harder for first time buyers to qualify for a mortgage which allows them to buy a home. In today's market first time buyers are already having a difficult time getting into the market. Why make it harder by promoting a policy that makes it even harder for them to get a mortgage which can service the average price of a home in the city? Why not concentrate on providing a policy which will allow more homes to be available to them. After all home buying is what has been driving our economy in a positive direction for years. 

With regards to Foreign investment I do agree that it may be a good idea to put some pressure on that segment and try and cool off foreign investors from paying high prices and driving up house prices but be cautious because if they decide its not a good place to buy they will buy elsewhere and promote other economies instead of ours. A slight increase in costs to foreign investors makes sense but lets use the tax dollars that comes in from that in order to provide a grant to first time buyers who are local or provide incentives to  builders to build more homes in order to alleviate the supply issue. Why not use tax revenue to help other Canadians  who need it? After all it will help our economy. 

In terms of whats coming ahead I have already heard a number of lenders are tightening their lending guidelines and making it harder to get financing on rental properties and making it harder to refinance by introducing new fees on refinances. They are also going to become more prudent on reviewing insured mortgages. This is what ultimately will effect the market. If Lenders tighten up and the flow of lending slows then in my experience this may effect a buyers choice and ability to purchase a property. By lenders making it more difficult to borrow, the outcome to sales I am sure will show. It will be interesting to see how the sales reports go in the next few months. My guess is that it will be really busy in the next few months as buyers and sellers are jumping to act quickly and things will cool in the coming months. If you are a seller who is looking to sell and downgrade or looking to sell your property and rent, now may be a good time to do so and time the market on your next purchase.

Let's see how the next couple of months of sales go. If you are interested in keeping up with sales reports feel welcome to visit my website at and subscribe to my newsletter. 

For any questions on the market feel welcome to call me at 416-856-5408 or email me

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