Analyzing years of mortgage rule impact

The most recent mortgage rule changes have had a much smaller impact on the market than previous policy changes and there’s a simple explanation for that, according to a new report.

The most recent mortgage rule changes have had a much smaller impact on the market than previous policy changes and there’s a simple explanation for that, according to a new report.

There has been an unprecedented number of housing policy changes over the past year-and-a-half, according to TD Bank, and each has been aimed at tempering housing demand.

And while the industry viewed the last round of changes as particularly invasive, they have proven less impactful than previous iterations.

“Each successive regulation change at the federal level has left a smaller mark on home buying activity. Our estimates suggest that the most recent federal rule changes may have only shaved 2% off demand nationwide,” TD Economists Beata Caranci and Diana Petramala, wrote in their latest report, Canadian Regional Housing Outlook Navigating a Soft Landing. “In contrast, the first regulatory changes implemented in 2008 dampened home sales by roughly 10%. That policy increased the required down payment from 0% to 5% for insured borrowers and lowered the allowable amortization period from 40 years to 35 years.”

The reason for dwindling influence, according to the economists, is that each round of mortgage rule changes has specifically targeted borrowers who require mortgage insurance.

“This incented a shift away from high loan-to-value mortgages into conventional mortgages,” the economists wrote. “New loans that require homebuyer’s insurance now account for less than 20% of all new chartered bank mortgage originations, compared to 40% prior to 2008. So, each round of policy changes has targeted a shrinking share of the overall market.”

The Bank of Canada claims insured mortgage originations fell 43% in 2016 and early 2017 from the peak in late 2015.

However, that shrinking share was up by a growing number of Canadians relying on conventional mortgages.

Looking forward, it seems federal policymakers aren’t quite finished with their market tinkering.

The Office of the Superintendent of Financial Services (OSFI) has proposed additional rules in the form of income tests for all borrowers at a rate of 2% higher than the contracted rate.

And that policy is expected to temper housing demand even further.

“ … if the new measures are put into place, which will cause buyers in the former group to adjust their behaviour by coming up with a bigger down payment, opting for a lower priced purchase, scaling back other debt, or delaying a home purchase altogether,” the economists wrote. “In the year of implementation, we estimate that this new rule could depress demand by 5% to 10%, and shave 2% to 4% off of our current forecast for the average price level in 2018. This will be yet another force limiting price growth in the future.”

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Qualifying rate to increase?

This is when one association is predicting the qualifying rate might jump.

A potential Bank of Canada benchmark rate increase has been the talk of the industry for the past few weeks, with many invested parties speculating on when the government will make the move.

For its part, the British Columbia Real Estate Association is predicting the Bank will hold off until 2018.

“While the likelihood of the Bank raising its target rate by the end of 2017 has certainly increased, we still expect the Bank to hold off until early 2018, particularly if oil prices remain low and inflation fails to pick up,” Cameron Muir, BCREA chief economist, wrote in his latest Mortgage Rate Forecast Report.

As a result, the association is also predicting the five-year qualifying rate will jump from 4.64%, as it stands today, to 4.74% in Q1 2018.

The average five-year mortgage rate, meanwhile — which sits around 2.61% — will jump to 2.79% by the end of Q3 2017, and then to 2.9% in Q4 and 3.05% in Q1 2018.

The qualifying rate is expected to hit 4.84% by Q4 2018 and the average five-year mortgage rate is predicted to reach 3.35%.

That’s the not-so-good news for those who plan to delaying buying a home until then. However, the rate increases will be the result of overall economic recovery.

“The Canadian economy has finally returned to good health following the rapid and dramatic decline of oil prices in late 2014 and the consequences of wildfires in Alberta last year. Since the third quarter of 2016, the Canadian economy has expanded at an average rate of 3.5 per cent, well above the Bank of Canada’s estimate of 1.7 per cent sustainable long-run growth,” Muir wrote. “After posting nearly 4 per cent growth in the first quarter of this year, we expect that real GDP growth will slow slightly to around 2.4 per cent in the second quarter with the economy ultimately growing 2.5 per cent this year and 2 per cent in 2018.

“If the economy continues to accelerate, and growth in real GDP is higher than currently expected by the Bank, slack in the economy could be eliminated by as early as the end of this year, which could push up the timetable for monetary tightening.”

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CREW poll: Pot growing in rentals

With a proposed marijuana legalization bill in the offing, should the government tweak the bill to ban people from growing in rented homes?

Take our poll today.

The Cannabis Act was introduced in the House of Commons earlier this week. Under the act, adults will be permitted to grow as many as four marijuana plants in their homes.

The announcement has one landlord group calling for reform already.

“Fundamentally we want marijuana growing to still be prohibited in rental units and in multiple-dwelling units, (ncouding) include condos (and) co-operatives,” The Canadian Federation of Apartment Associations President John Dickie told CBC News. “Because, from that point of view, there are impacts on the neighbours.”

There are also concerns about the impact grow-ops can have on the resale value of a home because of the stigma attached to those homes.

Growing plants in-house can also cause mould issues and increase the possibility of fire hazards, both of which could result in costly bills for homeowners.

Many lenders also shy away from financing former grow-op homes, according to several mortgage brokers.

“I think the government is obviously balancing a lot of issues here,” Dickie told CBC. “They do want to break the black market, and that’s important. But we think we can break the black market if they let people [only] grow it in their own owner-occupied homes, and the product is readily available in stores or by mail order.”

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New federal regulations to allow growing of medical marijuana at home

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Veteran estimates foreign investment as much as 70%, argues for regulation

One Toronto brokerage owner is calling for foreign buyer regulation, despite some blowback from his own brokers.

Carl Langschmidt, president of Condos.ca, recently penned a blog entitled Foreign Investor Tax and Regulation Please! – a polite, yet assertive call to action.

In the piece, Langschmidt argues foreign ownership stats are much higher than the CMHC’s estimate of 2.3% of sales in Toronto. He went so far as to call that figure “laughable.”

“Our talks with sales reps in the trenches indicate it is much higher; some reported as high as 70% foreign ownership at developments like CityPlace,” Langschmidt wrote.

Anecdotal evidence, to be sure. But how about this other piece of sobering hearsay?

“Personally, this week alone, one of the agents in my brokerage who was meant to be listing a 50 unit condo building was just informed today the developer sold the entire building to a Chinese consortium and that we’re not getting any of the listings,” Langschmidt told Canadian Real Estate Wealth. “That’s how hot the market is.”

Vancouver had success with its own foreign real estate regulation when it implemented a 15% sales tax. That helped contribute to double-digit cooling in what was once Canada’s hottest market.

And Toronto may soon have its own measures introduced, with Ontario’s budget expected in the coming weeks. Ontario Finance Minister Charles Sousa said the budget will contain policy aimed at addressing housing affordability.

“Demand is high for a number of factors,” he said, per the Canadian Press. “Could be speculators, could be people from outside the country, it could very well be the many who are now moving into Ontario creating that demand.”

While many have argued in favour of a similar approach in Toronto, Langschmidt suggests a multipronged strategy that could also include special regulations for prebuild home sales.

“Preconstruction sales has morphed into a totally separate specialization in real estate; it’s almost as if agents who specialize in that are so different from traditional real estate where you’re showing properties,” he said. “Preconstruction sales is all about pitching investors and often agents and groups go overseas to pitch. I’ve seen their presentations. I cringe at their presentations. It induces the speculation; half of them use numbers are (off). A lot of them don’t calculate ROIs correctly. This is where I think some regulation is required.

“Anyone selling a stock or investment vehicle, there’s regulations in the securities business about what you can say. Whereas with (real estate sales) it’s the wild west.”

Many believe foreign ownership is having a major impact on Toronto home prices and will likely applaud Langschmidt’s comments. However, that may not include a portion of real estate agents, his own included.

“The reason why I’m saying it is I don’t mind saying what I think is true,” Langschmidt said. “It will upset people who deal with foreign investors; even in my own brokerage I had someone call me up and say ‘we have a lot of foreign investors and they’re not going to be happy with our opinion on us.’”

Related stories:
Ontario hints at measures to cool real estate market in the budget
Don’t tax foreign buyers says real estate board

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Why we shouldn’t worry about debt-to-income record

One big bank is arguing the debt-to-income ratio is the most “useless economic indicator out there.”

167.3%.

You’ll read a lot about these two numbers in the coming days. That’s the debt to income ratio for all Canadians and it just hit a new high in Q4 of last year.

It’ll be whipped out when arguing against mortgage debt and for policies aimed at safeguarding Canadians from taking on even more debt.

But it isn’t that simple, according to Benjamin Tal, chief economist with CIBC. And the ratio isn’t even that useful.

“The attractiveness of the ratio is that it’s simple —one number catches all. But as we all know, the cost of simplicity is, at times, very high. The ratio compares the stock of debt to the flow of income,” Tal wrote in response to the release of the figure. “You are not required to pay off your mortgage in one year, so on that ground, that approach is faulty.

“It’s also the debt of people with debt, relative to the income of people with and without debt. Again a suboptimal comparison. And if foreign income plays a role in the housing market (and it does) that income is not part of the calculation.”

Still, news organizations jumped on it.

“Canadian households owed $2 trillion at the end of 2016,” the CBC proclaimed.

“Debt-to-income hits fresh record,” Reuters said.

But while debt-to-income levels seem frightening, CIBC argues it’s anything but.

“In many ways this ratio is designed to rise. In the past 25 years, the debt-to-income ratio fell only twice,” Tal wrote. “In a normally functioning economy, debt will rise faster than income.

“For the ratio to fall notably you need a significant shock such as the US financial crisis which led to the US debt-to-income ratio falling from over 160% to 140%,” he continued. “Is the ratio rising too fast? Not really. Total real household debt is now rising by just over 4% (year-over-year)—a rate that is in line with the performance seen during the jobless recovery of the 1990s.”

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CREA spotlights challenges

The Canadian Real Estate Association has released its first report of 2017, highlighting the challenges homebuyers are poised to face this year.

“Canadian homebuyers face some challenges this year, including new mortgage rules that make it harder to qualify for a mortgage and regulatory changes that will push up mortgage financing costs,” CREA President Cliff Iverson said. “It will take some time to gauge the extent to which these challenges will weigh on home buyers in different housing markets across Canada.”

Home sales fell 1.3% in January from December’s total. Sales activity was down in half of all local markets, led by the GTA, Greater Vancouver and Montreal markets.

Inventory continues to be an issue.

“The shortage of homes available for sale has become more severe in some cities, particularly in and around Toronto and in parts of BC,” said Gregory Klump, CREA’s Chief Economist. “Unless sales activity drops dramatically, the outlook for home prices remains strong in places that face a continuing supply shortage.”

The number of newly listed homes fell 6.7% in January – that’s the second consecutive monthly decline. New listings, meanwhile, were down in two-thirds of all markets.

“With the monthly decline in new listings surpassing the decline in sales, the national sales-to-new listings ratio jumped to 67.7% in January compared to 64.0% in December and 60.2% in November,” CREA said in a release. “A sales-to-new listings ratio between 40 and 60 is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers’ and sellers’ markets respectively.”

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Budget options for Canadian millennials in the age of soaring prices

With Canadian housing price growth having set new records this year, more and more millennials are branching out to other viable options aside from home ownership.

Among these alternatives, especially popular in red-hot Toronto, is cooperative purchases of homes between friends or relatives, The Canadian Press reported.

In its recent survey, RBC noted that co-ownership is a top choice among 24 per cent of millennials. HomeLife/Realty One Ltd. (Toronto) sales representative Alan Aronson said that a leading reason is that each of the buyers in a co-purchase can qualify for a larger mortgage, while sharing the remaining costs (such as land transfer taxes and insurance) among themselves.

However, Aronson warned that this route has its own share of risks, especially considering that relationships can and do become strained when it comes to money. For instance, if one party neglects their fiscal responsibilities, all the co-owners might be forced to sell the property early or might even lose it to the lenders.

Another option would be to rent, probably in perpetuity. Jason Heath of Objective Financial Partners said that this might indeed be the better choice in the most expensive markets, if one is willing to “ignore the practical and psychological benefits of home ownership.”

Instead of using one’s funds for down payment, one can instead invest it—and in the process avoid other, not initially obvious, expenses such as taxes and closing fees.

Earlier this month, Statistics Canada warned in its report that young workers nationwide are facing far worse conditions compared to professionals from older generations, with the youth unemployment rate over a period of 4 decades (from 1976 to 2015) being around 2.3 times higher than the rate among workers older than 25 years old.

This trend accompanied a severe decline in the take-home pay and the purchasing power of this demographic by the early 1980s, with young Canadian males (17 to 24 years old) experiencing a 15 per cent reduction in their real hourly wages, and young females suffering a 10 per cent drop.

Related Stories:

Young workers’ wage and job situation placing market at risk

Low down payments are ultimately detrimental to first-time buyers – CMHC head

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Revitalizing a neighbourhood

Meet the investors that are currently creating Toronto’s next hot spot.

For the past 20 years, the intersection of Yonge and St. Clair has acted almost exclusively as a transit hub for the affluent neighbourhoods surrounding it, including Forest Hill and Rosedale.

That’s about to change.

“For the last 30 years it’s kind of gone sideways whereas surrounding neighbourhoods have improved. Our goal is to bring it back to some form of former glory,” Lucas Manuel, managing director of Slate Advisors, told Canadian Real Estate Wealth. “To do that first we bought everything there, which helps. We own all four corners and eight office buildings in total. Effectively that allows us … to make changes fast and not rely on our neighbours to come along for the ride.”

Slate, itself, currently has an occupancy rate of 95% within its buildings, and those that aren’t currently occupied are being kept vacant to allow for flexibility as the vision evolves, according to Manuel.

That vision is one that will transform the area into a go-to neighbourhood as opposed to a strict thoroughfare.

“They’re dying to have a good restaurant that they can go to, so that’s a huge focus of ours. On one of the corners, the northwest corner, we’re looking to put a big restaurant. Other locations as well,” Manuel said. “One doesn’t do it but once you get critical mass and give people a choice people will start coming back to Yonge and St. Clair.”

Slate has a master plan for the entire neighbourhood, and it is actively working with developers and other property owners to revitalize the area.

They are currently in talks to develop a business improvement area (BIA) to address some of the area’s needs.

The entire overhaul is being done in phases, with the northeast corner expected to be completed by Christmas. The rest has a target of 2018.

And once those are completed, and other developers hop on board, there is nothing stopping the area from experiencing a retail and, indeed, further residential development.

“Nothing has interfered with the upward mobility of pricing in Rosedale and Forest Hill. It would be nice to think all the things we do kind of support that,” Manuel said. “What we’ve heard from residents in those neighbourhoods is a lot of excitement.”

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Investment Hot Spots:
Pointe-du-Lac, Erieau, Rossway, Arcadia, St. Mary’s

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CREA releases latest sales figures

Canadian home sales have fallen for a third consecutive month.

“Home sales continued to trend lower while price gains further accelerated in the Lower Mainland of British Columbia,” said Gregory Klump, CREA’s Chief Economist. “This suggests that sales are being reined in by a lack of inventory and a further deterioration in affordability. The new 15 per cent property transfer tax on Metro Vancouver home purchases by foreign buyers took effect on August 2nd, so it will take some time before the effect of the new tax on sales and prices can be observed. That said, the new tax will do little in the short term to increase the supply of homes.”

National home sales fell 1.3% month-over-month in July and 2.9% year-over-year.

The average price jumped 14.3% year-over-year last month. Newly listed homes, meanwhile, increased 1.2% month-over-month.

“National sales and price trends continue to be heavily influenced by a handful of places in Ontario and British Columbia and mask significant variations in local housing market trends and conditions across Canada,” said CREA President Cliff Iverson.

Many cities in those two provinces continue to be considered “seller’s markets.

“With sales down and new listings up, the national sales-to-new listings ratio eased to 61.6 percent in July 2016 – its second monthly decline following its peak of 65.3 percent in May. A sales-to-new listings ratio between 40 and 60 percent is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers’ and sellers’ markets respectively,” CREA said in a release. “The ratio was above 60 percent in about half of all local housing markets in July, virtually all of which continue to be located in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario.”

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Investment Hot Spots:
Tilley, Tilley, Norris Point, Newbury, Waldheim

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The next market set for major growth

Home owners in this one market have already enjoyed impressive price gains but, with it poised for even more growth, the best times may still be ahead for investors – both current and future.

Brampton, Ontario, is currently poised for some major infrastructure growth in the health services sector, with several major world class hospitals in the works. The investment is one that will spike job growth and, as a result, investment and home price growth.

“What we’re trying to do as a city is try to think … about where the puck is going to be. Where it has been in the city is certainly in the automotive sector. That’s how people outside the city thought of us,” Brampton Mayor Linda Jeffrey told Canadian Real Estate Wealth. “As I became mayor, I talked about this during the election, but we are the beneficiary of three rather large health care investments by the province of Ontario. Seven years ago we got funding for Brampton Civic, which is one of the biggest, most active hospitals in Canada.”

Around the same time, the city also received approval to rebuild Peel Memorial Hospital. Brampton has also received funding for a world class children’s hospital.

“The other facility we got funding for was ErinoakKids, which is one of the largest children treatment centres,” Jeffrey said. “They do rehab and support services. So those three investments really position us to find ways to attract the businesses that support the allied services that support those facilities. At the same time, we’re trying to attract a university.”

Brampton’s housing market is already performing well, and with the planned projects – which will provide numerous jobs and entice many buyers – that trend will likely continue. Not to mention the close proximity to Toronto and growing transit system.

According to Jeffrey, the area has already been the target of investors.

“I think it already has and certainly we’ve had a lot of interest,” she said.

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Investment Hot Spots:
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