Suggesting today’s real estate market is heating up is an understatement. It would be appropriate to say the market has been on fire for the last few years, and new government measures hope to bring the blaze under control.
There are those in the mortgage industry, however, who feel a harmful impact of these measures will be a reduction in the purchasing power of potential home buyers.
In October, 2017, the federal Office of the Superintendent of Financial institutions (OSFI) introduced new mortgage rules that went into effect Jan. 1. An independent agency reporting to Canada’s Minister of Finance, the OSFI has a mandate to “contribute to the safety and soundness of the Canadian financial system.”
The mortgage rule changes have largely been motivated by an increase in unsustainable household debts in Canada, as well as soaring house prices, and the risk to the overall economy these issues pose.
A notable new rule is that uninsured mortgages – where the home buyer has a down payment of 20 per cent or more – are now subjected to the same “stress test” that has been required of high-ratio, insured mortgages since 2016.
All mortgage applicants have to show they can afford their mortgage payments at either the five-year average rate posted by the Bank of Canada, or two percentage points higher than whatever deal they were able to negotiate; whichever measurement is higher. (When the regulations were introduced in October, the Bank of Canada’s benchmark rate was 4.89 per cent). These rule changes are mainly driven by an attempt to rein in household debt.
Kirsten Plester, a mortgage broker with Verico Reliance Mortgages in Orangeville, shares the opinion of brokers who feel the two-percentage-point addition to a negotiated mortgage reduces the amount a buyer can bid on a property.
For example, if a deal is reached for a mortgage of three per cent, the new rules essentially jump the mortgage to five per cent. “It reduces people’s buying power by 20 per cent,” figures Kirsten, adding that it’s another example of “the government putting the cart before the horse.”
She is not saying that government rules and regulations have had no success, whatsoever, in slowing down a housing market that many conceded was getting out of control. Kirsten is simply pointing out that stiffer regulations, alone, are not the ultimate solution.
She maintains that other factors, including the natural cycle of the housing market, play a major role and 2017 selling trends back her up.
Using the Toronto area as a barometer, MLS statistics show the average selling price of a detached home in 2017 was $1.3 million. This is a $100,000 decrease from a year earlier.
Meanwhile, over the same period, the average selling prices of less expensive townhouses and condos rose by $37,000 and $78,000 respectively.
While the market is still red hot in certain parts of the City of Toronto, other areas in the GTA are beginning to experience an overabundance of houses for sale.
“It comes down to the area you are looking at and how many (properties) for sale,” concludes Kirsten. “It’s supply and demand.”
As well, since all home buyers will be subjected to the same stress test, they might forego a larger down payment and simply come up with the minimum and take advantage of the lower rates being offered to high ratio clients.
Kirsten raises a caution flag, here, and advises people to be careful when they are looking to finance a home. Be more aware of the product you choose rather than the rate. Financial institutions, after all, have investors providing them the investment funds to lend out to their clients and if a mortgage loan is paid out early the clients will be responsible for any losses.
“There are provisions that can make it financially difficult for some clients to get out of a mortgage contract,” warns Kirsten, adding “it all might end up being “quite a costly mistake.”
Finally, she offers advice to potential home buyers that echoes the following axioms: Take a deep breath, count to ten and look thoroughly before you leap.
“Be patient. Buying a home is the biggest purchase of your life. Make sure all the pieces fit.”
Written by: Dan Pelton
Resource Materials: Verico Reliance Mortgages