The red-hot real estate markets in Toronto and Vancouver show no sign of slowing down. With that, the Organization for Economic Co-Operation and Development (OECD) is sounding the alarm, expressing its concern on lending growth in both cities.
Across the country, overall home sales jumped by more than 10 per cent in April, year over year. At the same time, prices in Toronto increased by 13 per cent while jumping a whopping 25 per cent in Vancouver. The two cities combined now make up one third of Canada’s total housing market. Some of the uptrend is attributed to foreign buyers who have been taking advantage of cheap mortgage costs.
What does this mean? The OECD says very low borrowing rates has only served to encourage credit growth and underpin skyrocketing house prices, resulting in both high prices and soaring debt. The organization says these concerns are not new but they show no sign of slowing down.
What the Big Banks are Saying about it
The Bank of Nova Scotia says it has taken its foot off the gas in terms of mortgage growth over the last couple of quarters. But in an interview with Bloomberg TV Canada earlier this month, Chief Executive Brian Porter says Canadians have shown time and again that they have a strong ability to self-regulate.
Meantime, BMO Chief Economist Doug Porter told the Financial Post that measures regulators have taken to strengthen federal mortgage rules and guard against severe mortgage debt has not been enough to curb the trend. He says the solution is to have a “wider lens”, and possibly crank up property taxes in line with the value of homes while making it tax-deductible so that existing homeowners aren’t paying the same price.
Benjamin Tal, Deputy Chief Economist of CIBC World Markets agrees, saying that some tightening of the rules is needed. He cited the rising of the subprime segment of the market – where high-risk borrowers may go if the big banks turn them down – saying that low interest rates can hide a lot of bad things.
National Bank’s CEO Louis Vachon told the Financial Post he believes down payments will return over time from five per cent back to 10 per cent, saying the larger figure combined with 25-year maximum amortization has worked well in the past.
What the OECD, CBA Wants to See
The OECD wants the Trudeau Government to further tighten federal mortgage rules, with regional targets for areas such as Toronto and Vancouver. However, they haven’t specified any changes that they want to see made.
The Canadian Bankers Association (CBA), however, told the Post that all of the country’s financial institutions are prudent lenders and only work with clients who have a proven ability to repay their loans. The CBA cites mortgage arrears as remaining extremely low at only 0.28 per cent.
Since the Liberals came to power in October, Finance Minister Bill Morneau has increased the down payment amount for the portion of a home priced above $500,000 from 5 per cent to 10 per cent for government-insured mortgages. However, homes purchased for $1-million or more still require a minimum down payment of 20 per cent. The first $500,000 still only requires a five per cent down payment.
What this Means for You, the Homebuyer
While it’s not as large of a concern if you live in a smaller market, it’s becoming increasingly difficult for a first time buyer or even a repeat buyer to find a place to call their own in Toronto and Vancouver let alone secure a mortgage. The Bank of Canada says it’s mostly up to the purchasers themselves and the big banks who offer these mortgages to take into account that house prices won’t likely continue to rise at the same pace.
But the Central Bank also says that we’re unlikely to see a repeat of what happened in the U.S. back in 2007 – a full real estate market collapse – because of our lack of a sub-prime mortgage market and higher mortgage underwriting standards.
So what should you do as a buyer? Once you’ve decided to jump into the market, look down the road and imagine what might happen in five years’ time. Sit down with a budget and write down different scenarios in the event the Bank of Canada decides to raise its key interest rate by one or two per cent – even though this isn’t expected to happen for the medium term.
But most importantly, make sure you are pre-approved for a mortgage prior to house hunting. It’s both necessary before putting in an offer on a property, and it also helps to give you a good idea of what you’re facing in a hot housing market. The more you’re prepared – both mentally and financially speaking – the more likely you will secure a mortgage and a home that best suits your needs and will keep you and your family happy and healthy for years to come.