Ottawa’s new mortgage rules more bark than bite?

There’s a lot of media bluster about the Liberal government‘s new down payment rules for home purchases over $500,000. Whereas the Liberals claim this move will help contain over-enthusiasm from home buyers enjoying current low interest rates, many investment and housing industry observers suggest it will have little impact nationally, will not subdue speculation in high priced cities, and in fact will hinder sales activity more than help in some already-depressed markets.

Heard the news? The minimum down payment for new insured mortgages required by the CMHC has been raised to 10% from 5% for the portion of house prices above $500,000. The new rules take effect in February 2016, and will require a purchaser considering a $750,000 home to have a minimum down payment of $50,000, made up of five per cent for the first $500,000, plus 10 per cent of the remaining $250,000.

The new CMHC minimum down payment requirements do little or nothing to help most first-time buyers

Toronto and Vancouver named as targets
Federal Finance Minister Bill Morneau feels the need to protect first-time buyers in high priced markets. “We recognize that, specifically in the Toronto and Vancouver markets, we have seen house prices that have been elevated,” he announced last week, “and we want to make sure we create an environment that protects the people buying homes so they have sufficient equity in their home.”

Location, location, location!
In fact, where you buy or sell matters as far as impact is concerned. According to the Canadian Real Estate Association, average home prices in Toronto are now more than $630,000,  a 7.5% increase from last year. In Vancouver, the average is closer to $1 million, up more than 15% in the last year alone.

While prices in Toronto and Vancouver continue higher, other markets are in trouble. The new requirements will only make matters worse in Alberta for example, given the economic slowdown being experienced there. “Almost 70% of new single family homes sold so far this year were priced above $500,000, and in Calgary that proportion is above 85%. We’re concerned when blanket national policies are imposed because of regional housing market issues,” said Jim Rivait, Chief Executive Officer, CHBA – Alberta.

Hurry! Hurry! Buy now!
Some observers predict a flurry of sales activity ahead of the February changes, with this winter’s mild weather in the East compelling even more people go home shopping, despite many first-time buyers in Toronto and Vancouver already pushed out of the market given the dizzying list prices. Others feel the rules will do little to reduce speculative activity by foreigners investing in Canadian residential real estate while the loonie trades at multi-year lows: They have oodles of cash anyway. And CIBC economist Benjamin Tal estimates the rules will affect less than 4 per cent of new mortgages. In fact, at a press conference this past Monday, Morneau himself estimated that the new rules would impact ‘only 1% of home buyers’ nationally.

Banks are getting more conservative
New mortgage rules from CMHC are just part of the home financing equation. The major banks have long considered a 5% down payment minimal at best, and conduct their own home value appraisals that can be significantly lower than the list price. On top of that are home owner equity requirements for renovations. At Canadian Contractor’s RenoFocus earlier this month, several builders and renovators commented on the banks’ conservative appraisals for re-financing and home equity loans. Those with big mortgages and little equity are finding themselves shut out of traditional bank re-financing entirely.  They either have to wait until their equity grows before renovating, which could take years, or turn to secondary lenders and be exposed to risks and costs entailed.

Want to read more!
Numbers and percentages of markets affected by the new rules
BNN’s take
CBC’s take
CTV’s take
What $500,000 buys across Canada
CHBA-Alberta Press Release regarding new mortgage rules