Are The New Mortgage Rules Working?

Demand for detached houses has far outstripped available supply over the last decade due to regulatory changes.

Then the Federal Government introduced new rules for mortgages in late 2016 to bring housing markets under control in Toronto and Vancouver, and Canadians are eager to know if it has worked.

The changes made thus far attempt to mitigate demand rather than improve supply, and that it just isn’t working in a supply-oriented market.


The Mortgage Rule Changes

There are four major changes to consider:


The Stress Test

Under the new system, Canadians need to pay 20% of the property’s cost up-front if they want to avoid facing the “stress test.” Lower down payments require buyers to be evaluated for their financial stability under harsher conditions, such as:

  • Additional payments (e.g. new cars, leased furniture)
  • Job loss or sudden illness
  • Increased interest rates
  • Unforeseen expenses (such as pets or children)

Banks have been mandated to apply these theoretical conditions to prospective home buyers to avoid enabling defaults in the future.

Is it working? While a small portion of buyers might now be shielded from making a risky bid on a home beyond their prices ranges, this also forced many young buyers out of the market. Many young Canadians have been pushed out of the market due to the stress test, but that hasn’t eliminated their demand for houses.

It has simply cut off prospective homebuyers from entering the market.

What those Canadians truly need are affordable homes, and that will only come with enough supply to match demand. In fact, this is needed as a main economic driver of growth for the entire province. Taxpayers need a place to live and lay down roots.


Capital Gains Reporting

Most who sell properties qualify for exemption from capital gains taxation, and they will continue to do so. The only change here comes in the form and timing of reporting property sales, which must occur during income tax submissions.

Is it working? Sadly, it didn’t really need fixing in the first place.

This change was aimed at preventing foreign buyers from flipping homes under the table. The capital gains tax exemption only applies to Canadian residents anyway, so this reporting change should only become a filter for the CRA to find foreign buyers skirting the system.

How many foreign buyers are there, really? Of them, how many are trying to “cheat the system?” Too few to notice.

The latest report from CBRE puts that number at no more than 5% of the market. Foreign capital isn’t to blame, and it’s unreasonable to imagine a few foreign buyers trying to benefit from reporting loopholes.

Canadian families are driving the growth, simply put.

And this isn’t “unnatural growth.” Ontario’s lack of a detached housing has shrunk the playing field so much that this reasonable market growth has become a fierce competition. Foreign capital is just a scapegoat for the larger issue at hand: housing supply.


Mortgage Insurance Restrictions

Low-ratio mortgage payments will need to meet new criteria in order to qualify for insurance, which are:

  • Property prices must be under $1 million
  • Amortization rates must be 25 years or fewer
  • Buyers’ credit scores must be at least 600
  • New owners must occupy the homes they buy

These restrictions do not apply to every home buyer—just those who want to qualify for insurance on a low-ratio mortgage payment plan. Everyone else will be free to continue as before.

Like the stress test, the new insurance restrictions should dissuade people from entering the housing market without the minimum level of financial stability. Yet they miss the mark. Preventing Canadians from entering the market isn’t helping them to find affordable housing.

Canadians without homes are Canadians without children, taxable property, or room to grow—key ingredients needed for economic growth and a happy population.


The Government’s Burden of Risk

The Federal Government is currently responsible for paying out insurance defaults, and that may soon change. It’s holding consultations to discuss the possibility of offloading some of that risk onto banks.

However, the government wouldn’t need to pay out insurance defaults if there enough homes in the area to drive down prices.

Supporting land development isn’t about removing less fortunate demographics or bulldozing protected areas. Less wealthy demographics have already been priced out of the housing market due to development restrictions, and Ontario governments are quite conscious of balancing green space with infrastructure.


Where Does Commercial Real Estate Go From Here?

Home prices are still high in Toronto and Vancouver. The average price across Canada is $589,795, according to the Globe and Mail—and that’s including the skewed numbers from the Toronto and Vancouver market.

The average price of a detached home in Toronto—the single most wanted type in Canada—falls between $1.24 and $1.28 million in Toronto proper and $730,000 for the entire GTA. Similarly, Vancouver’s average price for a detached home in metro areas was $914,763 in December 2016.

This cannot continue, and governments will need to begin supporting developers in order to meet the population’s needs—unpopular though it may be.

The changes to the mortgage rules don’t address the core issue of supply, but they do bring opportunity to us in several forms:

  • Consumers forced out of the detached housing market will search for condos, making them smart investments for the foreseeable future.
  • Securing land near developed areas will yield incredible profits if turned into detached homes—even outside of the most desired areas.


It’s a new kind of market, and MarshallZehr works with its investors and developers every day. Continue the conversation with us to gain consistent flow of development capital and project management expertise, no matter what the market looks like.