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Is the floor about to fall out of the Toronto housing market? Things may not be what they seem.
Written by: Outline Financial / Jan 30, 2018
For at least the last half decade, some economists and real estate analysts have predicted a crash in Toronto’s housing market. Minor, recent dips aside, it’s yet to happen.
Now, those same pundits might claim that their forecasts have been validated as monthly results flow in for the first quarter of 2018.
“Housing Market Collapse”…or is it something else?
‘Housing bubble finally bursts’ is one of many doom-and-gloom headlines we’ll likely be reading as those figures will almost certainly show a steep decline in year-over-year home sale prices over the first quarter of 2018. Economists may use this data and new market reality as the harbinger of a full-fledged market correction.
But the prognosticators who jump on the real estate-Armageddon band wagon may want to take a step back. A more nuanced analysis of recent sales trends will point to something different—a correction, yes, but not the crushing end of the Greater Toronto Area real estate boom that’s helped propel our city and country’s economic growth for more than a decade. Before we touch on that good news…
Reality Check: Year over Year Results Will be Brutal for Q1/2018
First quarter sales figures for the Toronto Real Estate Board (TREB) are going to be brutal when compared with 2017. Based on historical trends we are likely going to start the year with a single digit decline in average price growth for January (actual was just reported at -4.1%), with the pricing carnage set to peak at nearly a 15 per cent dip in March. We’ll finally see a return to meagre growth of around 1 per cent in June, before returning to more familiar price increases in the neighbourhood of 7 per cent by the end of the year.
At first glance that sharp drop in prices seem to be driven by a combination of softer market conditions, as well as the federal government’s move to cool housing prices and mitigate the risk posed by Canadians’ runaway household debt accumulation.
A Story of Debt and Stress Tests
Indeed, Canadians now owe $1.71 for every dollar of disposable income, according to Statistics Canada. That’s an increase of 1.4 per cent from last summer and marks a new high for personal indebtedness in this country. And yes, you guessed it, mortgages compromise the greatest proportion of our household debt at a mindboggling $1.3 trillion.
The Office of the Superintendent of Financial Institutions introduced a new mortgage stress test for uninsured mortgages on January 1, 2018, that forces would-be home buyers to prove they can handle the cost of carrying their mortgage at their lender’s contract rate, plus 2 per cent.
Not surprisingly, this will limit many Canadians’ home-purchasing power and curb demand, at least temporarily, as lesser-earning buyers are pushed out of the market.
In the case of a household earning $150,000 annual salary with a 20 per cent down payment of $230,000 for a new home, for example, the top mortgage approval amount will drop from $1.15 million to $985,000—a potential game-changer in tight markets such as Toronto and Vancouver.
So, the naysaying analysts were right all along, right? Not so fast…
Last March saw Toronto’s average year over year price increase peaking at more than 33 per cent—an unsustainably hot year for real estate prices. Now let’s take 2017 out of the equation for just a moment.
Although year-over-year price growth will run at huge decreases, if we step back and look at a multi-year scenario we’re likely going to see compound annual growth rates in the range of 4 per cent or more over a two-year period. Look further out and our models are forecasting five-year compound annual growth rates exceeding 8 per cent, and 10-year compound annual growth rates in the 7 per cent range.
So, yes, the Q1/2018 year over year numbers will be bad. But leaving that precipitous dip aside, it’s clear that prices are growing at or above their historical average. We need to maintain perspective and understand that this is federal mortgage policy at work—in fact, this is exactly what the government wanted.
In other words, the Toronto housing market isn’t entering a tailspin. It’s the economic equivalent of a sprinter slowing to a jog at the end of a record-setting race. Home prices in this city have been growing at a furious pace for a long time—a bit of rest is long overdue.
Just don’t expect the slowdown to last forever. Market fundamentals remain strong, so housing prices are almost certain to jump back into high gear by the end of the year.
B.C. Premier Announces First Time Home Buyer Assistance
This morning B.C. Premier Christy Clark announced the Home Owner Mortgage and Equity (HOME) Partnership program.
Through the B.C. HOME Partnership program, the Province is helping first-time home buyers by contributing to the amount they have already saved for a down payment with a loan that is interest-free and payment-free for the first five years.
Here is how it works:
- The B.C. HOME Partnership program will match the buyer’s contribution up to 5% of the home’s purchase price, to a maximum purchase price of $750,000.
- After five years, buyers can either repay their loan or enter into monthly payments at current interest rates.
- Loans through the program become due after 25 years – the same length as most mortgages.
Eligibility
The B.C. Home Owner Mortgage and Equity (HOME) Partnership supports eligible first-time homebuyers. To qualify for the program, all individuals with a registered interest on title must reside in the home and:
- Have been a Canadian citizen or permanent resident for at least five years and have resided in British Columbia for at least one year immediately preceeding the date of application
- Be a first-time buyer who has not owned an interest in a residence anywhere in the world at any time
- Use the property as their principal residence for the first five years
- Purchase a home that has a purchase price price of $750,000 or less (excluding taxes and fees)
- Obtain a high-ratio insured first mortgage on the property for at least 80% of the purchase price
- Have a combined, gross household income of all individuals on title not exceeding $150,000
- Have saved a down payment amount at least equal to the loan amount for which the buyer applied
How to apply
- Step 1: Get preapproval for an insured first mortgage from your financial lending institution.
- Step 2: Apply to BC Housing for the Home Owner Mortgage and Equity (HOME) partnership loan. If you are eligible, you will receive confirmation of eligibility and Homebuyer’s Kit which includes information for your Lender, Real Estate Agent, and Lawyer/Notary Public.
- Step 3: Find your home and provide the details of your planned purchase to BC Housing for approval.
Applications for the program will be accepted starting Jan. 16, 2017, for purchases that will close on or after Feb. 15, 2017.
What information is needed to apply? Buyers can begin gathering the documents they’ll need to submit an online application. Buyers will need:
- Proof of status in Canada and residency in British Columbia
- Secondary identification (must include your photo)
- Proof of income and tax filings
- Insured first mortgage pre-approval
CMHC Policy Revision: Get Ready for a Busy Weekend
As you enter the weekend, we wanted to provide you with an important update to the stress test implementation guidelines that were initially announced by the Minister of Finance on October 3rd. These changes to the initial announcement will likely result in a flood of buyers trying to beat the end of weekend deadline.
Our understanding of the revisions are as follows:
Updated guidance from CMHC and lenders state that the new stress test rules (i.e., having to qualify at the benchmark rate of 4.64% vs. the lower actual interest rate if you have less than a 20% down payment) will not apply to borrowers that enter into a legally binding agreement of purchase and sale before October 17th, 2016 regardless of the date the borrower applies for financing and/or the closing date of the purchase.
This is in contrast to the initial announcement that stated the submission for financing had to occur prior to October 17th and fund by March 1, 2017.
- Key Impact #1 – if someone purchases a property before or including this weekend, the old lending rules will still apply — even if the borrower submits a financing application after the Oct 17th cut-off date.
- Key Impact #2 – There was some uncertainty around new build purchases and if they have to register before March 1, 2017 to qualify under old lending guidelines. This latest update clarifies the issue as old lending rules should apply if a legally binding purchase and sale agreement is in place prior to Oct 17th (regardless of the occupancy or registration date).
We hope the above is timely and helpful, and we are on stand by should you have clarification questions or would like to discuss.
Please find below a link to our previously issued updates on this topic:
Sincerely,
Outline Financial
How Could the Recent Mortgage Policy Changes Impact You?
What a week — As noted in a previous post, the Minister of Finance caught everyone off guard earlier this week with what could be the most significant changes to the real estate and financing market we’ve seen yet.
While we will continue to post updates on our website, should you have any questions please call or email at any time as our team is on standby to discuss how these changes may impact you and/or any opportunities that may still be available given we are at the lowest interest rate point in history.
What has changed?
We have included a list of key articles at the bottom of this email that describe the changes in detail, but in summary:
- October 17th – the maximum affordability for those with less than a 20% down payment will be reduced dramatically. As an example, someone that could have qualified for an $800,000 purchase on October 16th could see that shrink to $650,000 on October 17th.
- Impact for those with more than 20% down payment (or refinances) – While this area is still in flux, what we do know at this point is that the cost and restrictions for lenders to securitize their mortgages will be increasing – which will ultimately be reflected in higher rates and/or tighter mortgage restrictions for the consumer.
How Could This Impact You?
Depending on your current circumstances and/or goals, you may want to consider the following potential risks or opportunities:
- Qualification Impact – The potential for higher rates (actual and/or qualifying), shorter amortizations, and tougher qualifying guidelines could make it increasingly difficult to purchase at desired price levels or access existing equity in your home. If you have any plans to renovate, consolidate debts for a lower overall interest cost, purchase an investment property, or borrow to invest, it may be an opportune time to look at your options under existing lending rules.
- Rate Impact – to put it bluntly, rates have never been lower. Given the recently announced changes, combined with regulatory statements published earlier this year, we anticipate a steady upward pressure on mortgage rates over the coming weeks, months, and year. If you were/are planning on accessing any additional equity from your home, or would like us to review any opportunity to restructure your current mortgage/rate, we are happy to assist.
- Home Value Impact – consistently high demand and low supply has driven GTA average price increases into the double digits (on pace for 14%+ year over year growth in 2016). The recent changes should slow the demand side of the equation (move some buyers down in price, or out of the market completely) resulting in potential buying opportunities for qualified borrowers. On the flip side, if you are looking to sell or refinance, as the changes will take some time to work through the market this could signal a good opportunity to review your options.
Media Summary:
October 2016
- Link -> [CBC News: Ottawa tightens mortgage requirements and targets foreign money]
- Link -> [Financial Post: Federal government closes tax loophole used by foreign home buyers, hikes mortgage scrutiny]
- Link -> [Bloomberg: Canada Tightens Mortgage Eligibility, Closes Loophole]
- Link -> [The Globe and Mail: Four Major Changes to Canada’s Housing Rules]
September 2016
July 2016
- Link -> [The Globe and Mail: Banking regulator cracking down on mortgage lending as home prices surge]
December 2015
Please contact our team if you have any questions, or would like any additional information.
Sincerely,
Outline Financial
Major Policy Change – Mortgage Qualification Guidelines
While the details are still trickling in, The Minister of Finance potentially dropped a bombshell on the Toronto real estate market as of this morning. While their press release was vague [click here], we understand the changes to be as follows:
Mortgage Qualification Policy Change: Currently, if you select a 5-year fixed mortgage term, you would qualify based on your actual monthly mortgage payment (i.e., calculated on 5-year fixed rates in the low to mid 2% range). Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the Bank of Canada “stress-test” Benchmark Rate (currently 4.64%) — resulting in a significantly reduced maximum purchase price (refer to impact section below).
Implementation Dates: It is expected this change will be effective on October 17th for all those with less than 20% down. We are awaiting additional details, but the change may also impact those with greater than 20% down given the banks/lenders use of portfolio insurance. If that is indeed the case, it is expected that change may be implemented on November 30th.
Impact: While every case is different, we have included a sample max purchase price impact calculation for a 10% down buyer. Please contact us if you would like us to run the numbers for any specific scenario:
Impact Example (Max Affordability):
Total household salaried income = $120,000
Down payment available = 10%
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)
Current Max Purchase Price = Approx. $800,000*
Max Purchase Price After Oct 17th = Approx. $640,000*
(Note: the above is for illustration only. Please contact a member of The Lang Team to discuss)
Media Coverage: While additional details are expected to be published throughout the week, we have included a few relevant articles that have come out in the media today. We have also reached out the Department of Finance, lenders, and mortgage insurers directly and will pass along any relevant information as/when received.
- CTV News – Plans to Tighten Mortgage Insurance Rules
- The Globe and Mail – New Housing Measures
- CBC – Ottawa Tightens Mortgage Requirements
Should you have any questions regarding the above, please contact any member of our team.
Budget 2016 Highlights
Finance Minister Morneau’s budget includes many new infrastructure spending initiatives that will support our economy and help continue our growth, albeit controlled, with a view to the long-term success of the country. His budget is focused on middle-class families, seniors and veterans, helping the less fortunate, committing to a clean economy, and strengthening relationships with indigenous peoples.
Here are a few highlights that specifically affect the mortgage and housing sectors:
Affordable Housing
The government announced it will spend $2.3 billion over the next two years. A significant portion of this will be allocated to provinces and territories were the need for investment is greatest. There will also be considerable investment in First Nations, Inuit and northern housing. The government also announced it will invest $208 million over five years to create an “Affordable Rental Housing Innovation Fund” to be administered by CMHC.
Researching the Impacts of Foreign Ownership
Minister Morneau stated the government will investigate the impact of foreign ownership on housing and household indebtedness. Statistics Canada will develop methods for gathering data on foreign ownership on purchases of Canadian housing.
Introducing a Bank Recapitalization “Bail-in” Regime
To protect Canadian taxpayers in the unlikely event of a large bank failure, the government is proposing to implement a bail-in regime that would impose bank shareholders and creditors be held responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.
We will continue to monitor the discussions that result from the budget announced today and keep you informed of further developments.
*The above article is courtesy of Mortgage Professionals Canada, our industry association.
*Picture courtesy of Macleans.ca
Outline Financial
Toronto’s team of industry experts includes former entrepreneurs and some of Canada’s most respected mortgage and insurance executives and professionals.
