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Canadian Mortgage Policy Changes - brief view of a price collapse.


Blog by Raphael Milczynski | December 14th, 2016


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Canadian Government mortgage policy changes and possible influences on the Canadian real estate are on top of minds of most real estate professionals today.

As most of you have heard the Government of Canada has decided to make several changes to the mortgage rules, how mortgages are insured, as well as other requirements that are likely to increase the cost of interest and taxes in the long term. Here are the changes in a nutshell:

1.      As of Oct. 17, expanding a mortgage rate stress test to all mortgages.

2.      As of Nov. 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages. Amortization period must be 25 years or less, the purchase price is less than $1-million, the buyer has a credit score of 600 and the property must be owner-occupied. Mortgage rate stress test to portfolio insured mortgages / bulk underwritten mortgages with 20% or more down.

3.      New reporting rules for the primary residence capital gains exemption. When you sell your primary residence you must report the sale and the amount of your gains.

4.      The government is launching consultations on lender risk sharing. Government wants to lower its exposure to risk of defaults.

Plus - Office of the Superintendent of Financial Institutions rule changes:           

The new rules by OSFI, will force government-backed insurers to bolster their capital on mortgages in certain areas. Effective January 1, 2017, these changes could make mortgages more expensive for insurers and consumers alike.

Well what does it all mean to the Canadian real estate market?

1.     Based on today's rates, that means a borrower that could qualify for a mortgage at a 5-year fixed rate of 2.29% now will have to qualify at the qualifying rate of 4.64%. Effectively a 20% reduction in borrowing power of a new mortgage applicant. As well as a likely interest/fee increases to the investment and rental property purchases for individuals or businesses, due to the stress test of the portfolio insured mortgages. The latter rule details postponed to Nov. 30

The intent of this rule is twofold, firstly to reduce further exposure of CMHC to high ratio mortgages and second to force the real estate market into across the board price reduction as incomes remain stagnant. 

2.     Government aims to lower its exposure to the risk on these mortgages, while in theory restricting the possibility of renting them out; enforcement of rental limitation will be difficult.

3.     This rule at first glance is aimed at the speculators, foreign buyers and quick turnaround sellers that would claim the primary residence capital gains exemption while not using the property as a primary residence, and selling before occupying the property for a year. Read on.

On the other hand, this type of data collection in a long term will provide the government with information on how much capital gains were realized by the sellers and increases the likelihood of tax collection on those amounts.

4.     The government is looking into ways to share the risk of the mortgage insurance and in this way increases the cost of business for the financial institutions. Higher costs are very likely to be passed onto the consumers and will translate into higher interest rates.

Overall the new rules will most likely have the following effects:

1.    The real estate market is likely to experience price reductions due to the first buyers’ inability to finance existing price levels thus creating more renters.  Due to this demand rents in provinces without rent controls will experience upward pressure.

2.    Overall equity of all real estate owners will be reduced and will put a further downward pressure on the Canadian real estate prices, as down payments become smaller.

3.    Cost of borrowing will most likely increase even as the Bank of Canada prime rate remains at current levels, due to the increase in cost of insurance to the lenders.

4.     Competition in the mortgage market will be reduced while the chartered banks experience gains, by the fact that the portfolio insurance rule does not apply to them due to deposits that cover their 20% or more down payments on conventional mortgages.

5.    Canadian GDP will be reduced as new rules create more renters and reduce investment.

6.    Uncertainty will create buying opportunities for those with strong cash positions and those otherwise unaffected by the rules. As much as the foreign buyers are blamed for Canadian house price increases one must keep in mind the price levels and borrowing cost in the global market, as compared to prices of Canadian real estate become more attractive so will the like hood of investment.

Every real estate purchase and sale, individual residence or an investment property must be analyzed on individual basis. Appreciating and depreciating markets create their own sets of opportunities. Real estate as a commodity is by its nature a long term investment and should be always approached in that way. As Warren Buffet once wrote “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” As this maxim might not apply to personal residences it definitely applies to investment properties. Real estate holdings provide opportunities of passive income, equity creation and legacy building to name a few.

If you looking to discuss the real estate, sell or buy personal or investment property in British Columbia or Alberta please don’t hesitate to contact me Raphael Milczynski 778.985.8189