You’d have to have been living under a rock – and certainly not in a house – to not know that various experts are concerned the Canadian real estate market is in the midst of bubble that will eventually pop, particularly in the super-hot Toronto and Vancouver markets. Earlier this month, the federal government announced some key financial changes that it hopes will help rein in ever-escalating house prices and help avoid a disastrous crash in the Canadian housing market. Some of these changes are now in effect.
The first change is having mortgage lenders implement a so-called “stress test” to all applicants who apply for a mortgage with less than a 20% down payment (i.e. high-ratio mortgages) to ensure they can still afford to make their payments if – and when – interest rates rise. The way they’ll do that is, no matter what rate you manage to negotiate with your lender, you’ll have to qualify for a mortgage based on the five-year conventional mortgage rate that the Bank of Canada posts every week. They calculate that rate by using the mode (most common) rate posted by the big six banks. It’s typically higher than the rate a homebuyer would actually pay. As of September 28, it was at 4.64%.
Buyers who put less than 20% down will have to face this test starting on November 30, 2016.
Reining in Mortgage Insurance
The government is also tightening up the rules relating to mortgage insurance for buyers with 20% or less for their down payment. To qualify for this insurance – which is provided by the CMHC or one of two private providers – the home must be owner-occupied, cost less than $1-million, have an amortization period of 25 years or less, and the mortgage applicant has to have a credit score of at least 600. Again, these measures are intended to help ensure that people can afford to keep making their payments when interest rates do inevitably rise.
Tying up Loopholes
When you sell an asset such as stocks or an investment property, you are required to pay what’s called capital gains tax on any earnings (the difference between what you paid for it and what it sold for). The one exception is your “principal residence.” While that generally refers to your house, if you own a cottage and the value of your recreational property has risen significantly more than your city home has, you’re legally allowed to claim the cottage as your “principal residence” – even if you’re only there a few weeks per year. That means you can pay a lower amount of capital gains tax on your house when you sell it. A family is only allowed to make this claim once per year and they must be Canadian residents to do so.
Until now, when you sold your home under the capital gains exemption, there was no requirement to record the sale. Going forward, the Canada Revenue Agency will require you to include details of the sale on your tax return. It appears that the goal here is to curtail house flipping, particularly by foreign owners who do not qualify for the exemption.
The View from Vancouver
These measures are on top of changes implemented by the federal Liberal government shortly after Prime Minister Justin Trudeau took office. Those changes, which included raising the minimum down payment required to purchase homes valued at more than $500,000 and reducing the amortization period on high-ratio mortgages to a maximum of 25 years, did little to slow down the country’s hottest real estate markets. The average price of a detached home in Vancouver has continued to skyrocket, now topping $1.5-million. Swiss bank UBS recently rated the city as the most likely real estate market in the world to burst.
One often blamed foreign buyers – the majority of whom are from the Asia/Pacific region – for driving prices higher. Many of these buyers see the city as a safe place to invest their money, rather than a place to actually live. This not only contributed to pricing most first-timers out of the market but also led to many Vancouver neighbourhoods becoming virtual ghost towns with numerous vacant properties.
In August, the provincial government introduced a 15% tax on foreign buyers and that, finally, seems to have had some effect. Stats released earlier this week show that home sales in the city fell by 33% in September compared to the same month in 2015. While prices continue to rise year over year, the average home price for Metro Vancouver last month was down 0.1% from August.
Meanwhile, in Toronto …
Sales and prices continue to rise in Canada’s biggest city, with a detached home now going for an average of $1.29-million, up 23% from last year. There’s still no sign of a slowdown in sight for potential homebuyers in Toronto, who may be patiently waiting for prices to stop climbing before they can finally afford their own property. Whether these new rules will help, we’ll just have to wait and see.
Do you believe these measures will help slow down Canada's hottest housing markets? Leave us your thoughts in the comments below!