Ottawa tightens mortgage rules to cool off red-hot Vancouver, Toronto

The federal government is attempting to take some momentum out of the country’s most expensive — and frothiest — housing markets in Vancouver and Toronto, announcing Friday changes to mortgage lending rules that lift minimum down payment requirements on homes listed between $500,000 and one million dollars.

At a press conference in Ottawa, Finance Minister Bill Morneau said that as of Feb. 15, buyers purchasing homes in that price range will have to make a minimum down payment of 5 per cent on the first $500,000, and 10 per cent of the dollar value above that amount.

Morneau used the example of a $700,000 home, which will now require a minimum down payment of $45,000, or an increase of $10,000 above what the existing minimum of 5 per cent would require.

“By targeting higher priced homes, we’ll minimize the impact on first time buyers,” the minister said. “This protects all homeowners, including middle class Canadians whose biggest investment is in their homes.”

Benchmark home prices in Vancouver and Toronto have rocketed higher this year amid ultra-low borrowing rates and sustained interest from foreign buyers, experts say. Each city’s boom has led to market dynamics in those centres that are “not as stable as they should be,” Morneau suggested.

Clear targets

How effective the new minimums will be in cooling off those markets isn’t clear — the finance minister said the change would affect “one percent or less” of borrowers.

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About a quarter of homebuyers put less than 10 per cent down on the purchase of home, according to BMO Capital Markets.

“While we don’t precisely know how that share is distributed through the price ranges, it would imply that, at most, only about three to four percent of the national market gets impacted,” BMO economist Robert Kavcic said. “In reality, the impact should be even smaller given that low down payments are skewed more toward the lower end of the market.”

Benchmark home prices in Vancouver and Toronto sit well above the $500,000 mark, with 43 per cent of sales in Toronto this year falling into the affected range. “Toronto and Vancouver are the clear targets,” Kavcic said.

Bubble fears

Fears over a possible real estate bubble in the Vancouver and Toronto areas have risen significantly as prices have surged.

In November, benchmark prices in Vancouver surged 17.8 per cent as sales soared 40.1 per cent, the region’s real estate association said.

In slightly tamer Toronto, benchmark prices increased 10.3 per cent as sales climbed 14 per cent compared to November a year ago, making 2015 the most active year on record for the country’s biggest housing market (eclipsing 2007).

MORE: Already lofty home prices in Vancouver and Toronto continue to surge

Decoupled

The Vancouver and Toronto markets have firmly decoupled from the rest of the country, where home prices are moving at a far slower rate of about 2.5 per cent, according to CREA, the national real estate board.

What’s fueling the torrid price gains remains a matter of fierce debate, but many suspect a wave of foreign cash is playing a key inflationary role. Rock bottom interest rates are also continuing to fuel domestic demand.

“An influx of foreign wealth is one driving force, but lower interest rates — and the witches’ spell of forever-low rates—are also stirring the pot,” Sal Guatieri, economist at BMO, said in a recent note.

WATCH: New mortgage rules will help ‘protect Canadians’:  finance minister