Could changes to mortgage qualification rules be enough to cool the hotter-than-hot Canadian housing market? We’ll find out soon enough, with the changes taking effect on Tuesday, June 1.
A new study by Ipsos Reid-TD Bank revealed that most young Canadians are prepared to engage in bidding wars and pay over the asking price. About one-fifth of homebuyers would be willing to offer $50,000 above the asking price, while 13 per cent would be willing to offer as much as $100,000 over the asking price. Overall, most survey participants admitted that it is challenging to find a home they can afford. And, thus, this is the state of the Canadian real estate market.
According to the Canadian Real Estate Association (CREA), residential sales declined 12.5 per cent in April, but the MLS® Home Price Index (HPI), which is considered more of an accurate representation than average and median pricing, climbed 2.4 per cent to a little more than $700,000. But while borrowing has never been cheaper, saving for a down payment can be difficult.
Over the last 12 months, the red-hot Canadian housing market has triggered an affordability crisis.
Before the coronavirus pandemic turned the Canadian economy upside down, it was typically the major urban housing markets, such as Toronto and Vancouver, that priced out most first-time homebuyers and young families. Today, nearly every housing market in Canada has become too expensive for many hopeful homebuyers, leading to calls for government intervention and monetary policy action.
But could public policy serve as a panacea for the current housing boom? Or would other market-based factors, such as more supply, be more effective in dousing the flames of this red-hot national market?
Could Tighter Mortgage Rules Cool the Canadian Housing Market?
Mortgage rates have been steadily declining for the last 40 years, falling from more than 20 per cent in the early 1980s. This has allowed borrowers to take out larger mortgages, garner more housing options, and participate in cutthroat bidding wars.
In April, Canada’s top banking regulator proposed increasing the mortgage stress test level to 5.25 per cent, or roughly two percentage points above the market rate. This is up from the current 4.79 per cent. The purpose of the Office of the Superintendent of Financial Institutions (OSFI) adjustment is to ensure borrowers have the finances to pay for the loan at a higher rate, no matter what the lender is charging.
“The current Canadian housing market conditions have the potential to put lenders at increased financial risk,” OSFI said in a statement, adding that it wants borrowers to ensure they are financially secure five years from now. “OSFI is taking proactive action at this time so that banks will continue to be resilient.”
A 25-year mortgage of $700,000 at a five-year fixed-rate of 4.79 per cent would result in monthly payments of $4,006. If the rate were raised to 5.25 per cent, the monthly payment would be $4,194. It might not seem like much on paper, but for families that are house-rich and cash-poor, it can be a lot of money. Overall, it would make it harder to qualify for a mortgage, potentially reducing the number of qualified borrowers. If enacted, the idea is that it would ease the upward pressure on housing prices.
The new rules are scheduled to go into effect as of June 1 for uninsured loans. In the past, policy changes such as these created a stampede of homebuyers, rushing into the market to lock in a lower mortgage rate. There has not been any evidence of this yet, ahead of Tuesday’s kick-off.
Will the Canadian Real Estate Market Face Other Regulations?
What else could be done to rein in the Canadian real estate market? The National Bank of Canada suggests that the government could institute a ban on blind bidding. This consists of submitting bids on a property without knowing the value of competing offers. Proponents say this would effectively slow down the growth of real estate prices.
Others believe that raising interest rates would be a successful strategy to putting a cap on price growth. Since it would cost more to borrow, homebuyers would not be incentivized to take out a larger loan than they initially wanted so they could bid for a bigger home.
So far, the Bank of Canada (BoC) has not signalled that it will pull the trigger on a rate hike, although it reduces its monthly bond purchases. Speaking to reporters in March, BoC Governor Tiff Macklem expressed concern with the significant increases in the level of debt homebuyers are taking on to chase rising valuations across the Canadian real estate market.
“With so many households working and studying at home, we see many people want more space and interest rates have been unusually low, making borrowing more affordable. While the resulting house price increases are rooted in fundamentals, we are seeing signs of extrapolative expectations and speculative behaviour,” Macklem told the press.
“Given elevated levels of household debt and the risk that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages. New measures just announced in the federal budget will also be helpful.”
But while taxes and public policy pursuits might achieve some short-term gain, they might not produce a long-term solution.
New Housing Supply Might be the Only Answer
Christopher Alexander, Chief Strategy Officer and Executive Vice President at RE/MAX of Ontario-Atlantic Canada, and Elton Ash, Regional Executive Vice President at RE/MAX of Western Canada, are urging the government to be cautious with considering cooling measures. The most critical factor in explaining the housing boom is strong demand and low inventory.
As a result, these industry leaders put forth three recommendations that will be most effective in cooling the real estate market:
- Add a mandatory condition to every offer to ensure the purchase is conditional on financing.
- Institute an industry watchdog to monitor transactions where homes are sold well over the asking price.
- Create more supply.
The final option is something that federal policymakers may have heeded, but arguably not to the degree required. In the 2021 Federal Budget, the Liberal government proposed $3.8 billion in funding for the construction, repair and support of approximately 35,000 additional housing units. Whether this is enough to curb the spike in prices or not remains to be seen, but at least it adds to the staggeringly low levels of stocks.
However, the concerning trend is that the seasonally adjusted annualized rate of housing starts tumbled 19.8 per cent in April to 268,631 units, falling short of the median estimate of 280,000 unit starts, according to the Canadian Mortgage and Housing Corporation (CMHC).
Homebuyers Still Struggle to Access Canadian Real Estate Markets
Many housing areas, from British Columbia to Nova Scotia, are struggling through an affordability crisis. Statistics Canada reports that the median after-tax income of Canadian families of two or more people sits at $63,000, which may not be enough to purchase a property in many parts of the country. With or without regulations, it is becoming increasingly more complicated for households to buy a home, relying on generational financing to purchase a property.
This is why it is critical to work with a trusted and experience REALTOR® to ensure you find a home that matches your needs and budget. In this type of market, you never want to go into it alone – you need an ally!