Over the past several years, both the Federal Government and the Bank of Canada have taken significant actions aimed at cooling Canada’s housing prices. The intent was to engineer a soft landing for residential real estate, and avoid a very disruptive price-bubble burst.
The B.C. and Ontario governments also weighed in with a 15 per cent extra tax on properties sold to non-resident buyers in the Greater Vancouver and Toronto regions.
Rising interest rates in the past 12 months have produced a best-available 5-year mortgage rate increase of about 0.5 per cent, from 2.5 per cent to approximately 3 per cent. Rising prime rates have had an immediate impact on holders of variable-rate mortgages.
A new “Stress Test” for high-ratio mortgages forced those borrowers to qualify based on the posted five-year fixed rate, rather than on the rate they were actually able to negotiate – thus substantially reducing borrowing capacity, particularly for the first-time buyer.
The effect of these efforts? In many areas, the upward price spiral has definitely moderated, and in some price ranges, even reversed. Not enough however, in the eyes of the Federal Government.
On January 1, 2018, the perhaps most consequential change in mortgage lending regulations will take effect. Not only will the high-ratio borrower need to qualify based on the greater of the five-year published benchmark rate, OR the lender’s actual offered rate plus 2 per cent (whichever is higher), but also, this rule will apply to ALL mortgages, new or renewed, even if the down payment exceeds 20 per cent. Extending the stress test to all holders of new mortgages, rather than only those with minimal down payments, could have very substantial consequences for both housing demand and prices. In fact, this one change could result in a far greater impact than all the other changes of the past several years, combined.
Since the announcement of this latest change, mortgage brokers confirm that applications for mortgage approvals have spiked, as potential buyers strive to qualify under the “old” rules. Potential buyers have realized that the new regulation could reduce their mortgage qualification value by as much as 20%. It is difficult to imagine that such shrinkage of borrowing capacity will not have a significant impact on housing demand nation-wide and hence, prices.
A bit of good news for existing mortgage holders is that an exemption to this new rule exists if they choose to renew their mortgage with their current lender. However, should they decide to move their mortgage to a lender offering a better rate, they will be subject to the new stress test. The result for some existing borrowers, will be less mobility with their mortgage, and hence less negotiating power with their current lender. Hardly a winning result for the borrower.
Pre-approved mortgages will minimize the effect of this latest change in the first quarter of 2018, but thereafter, the full impact is likely to be felt. Because housing demand is bound to weaken as the new year progresses, sellers may be wise to price realistically, to achieve a sale in the next few months. Another drag, beyond this new stress test, is the high likelihood of several more interest rate increases in 2018.
We can only hope the federal government’s intent to achieve a soft landing for the real estate market does not overshoot its objective, causing a major reversal in demand, and significantly dampening economic activity across Canada.
A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his recently-released THIRD Edition of The SMART CANADIAN WEALTH-BUILDER.