Canadian real estate ended 2017 strong as buyers rushed to beat the New Year’s coming mortgage rules.
New mortgage rules were announced in the fourth quarter of 2017 in October. This gave prospective demand enough time to prepare before the market saw their implementation.
“National home sales in December were likely boosted by seasonal adjustment factors and a potential pull-forward of demand before new mortgage regulations came into effect this year,” said Gregory Klump, CREA’s Chief Economist, in a recent report. “It will be interesting to see if monthly sales activity continues to rise despite tighter mortgage regulations that took effect on January 1st.”
Stress testing rule puts pressure on buyers
The highlight of the new mortgage rules was the coming stress testing for all mortgagors (borrowers). Stress testing has always been required for insured mortgages. With the new rules it's now a requirement for all borrowers who apply for a mortgage.
Stress testing requires a mortgagor to qualify for a rate 2% higher than the contractual rate they’ll actually receive or the five-year benchmark posted by the Bank of Canada.
For a legal and fully detailed outline visit the Office of the Superintendent of Financial Institutions news release detailing the new mortgage rules.
A mortgage with less than 20% down is required to be insured. The lender requires further reassurance to get the borrower to qualify for a mortgage through the stress test.
Mortgage insurance is not for the borrower but for the lender. It's to protect against the chance of borrower default on a mortgage and the home doesn’t recover the mortgage amount through the Power of Sale. Therefore mortgage insurance is not for borrower, but for the lender. Stress testing is just an added security to ensure that the borrower isn't at risk for default.
The advantage for a borrower to provide more than 20% down payment for a home was they didn't require insurance. A cost the borrower must take on despite it being for lender security.
Given December’s exponential real estate stats it’s evident that home buyers rushed to their brokerages and banks. A rush to avoid the additional requirement that might make financing either unfavourable or not allow them to receive funding.
The Six saw the heat of this rush with a flooding sideline of anticipating demand
As you can image this puts a decent amount of pressure on prospective home buyers, especially a sideline of buyers in Toronto awaiting the promised cool of the Ontario Fair Housing Plan. This pressure caused many to rush their home purchase before the new rules.
In a surge to beat the new rules, prospective Toronto home buyer broke the two quarter frozen market anticipation. A frozen market in anticipation for a coming cool promised by the Fair Housing Plan. Counter to the heralded cool by the government, the mortgage rules proved that the market was delayed in anticipation.
It may be the coldest in 100 years, but Toronto real estate is still hot
December’s housing rush broke records and made the year the second consecutive high for Toronto real estate.
“Much of the sales volatility in 2017 was brought about by government policy decisions, said Tim Syrianos, President of the Toronto Real Estate Board, in a recent report. “Research from TREB, the provincial government and Statistics Canada showed that foreign home buying was not a major driver of sales in the GTA. However, the Ontario Fair Housing Plan, which included a foreign buyer tax, had a marked psychological impact on the marketplace.”
According to TREB, the year’s first quarter was hyper-appreciated by the tight pressure of a low market supply combined with a high demand. A quarter that got flipped on its head for the next two quarters. A stretch that saw a falling out of buyer demand and a supply increased in its absence.
Funny that when the cold winter glazes over Canada, does Toronto see that its market is not really that cool. But more halted as buyer’s left the sidelines to beat the mortgage rules.
New mortgage rules could bring the cool to market
The new mortgage rules are bound to add a true suppression of demand through the coming year. A much needed suppression to control an out of control housing market in the Six and across the nation.
Despite the lack of cool from government regulation, the new mortgage regulations could form a combination of pressure on demand. A suppression of demand to make 2018 a cooler year for real estate in comparison the past. These also in combination with the Bank of Canada's past and coming interest rate increases.
“Looking forward, government policy could continue to influence consumer behavior in 2018, as changes to federal mortgage lending guidelines come into effect,” continued Tim Syrianos.
OFSI have taken the responsible approach to supressing a market, while also taking safe measures against a hot market. It's in the best interest of a real estate market that's inflated by a variety of market accelerators.
High demand and coveted property for living and investment as the equitable gains from the Canadian wealth effect have never been so evident in any city, other than that of its western counterpart, Vancouver.
Everyone wants in, but that just isn't responsible especially with market heights like these. The new mortgage rules and coming interest increases are bound to supress a market out of control through demand.