New real estate rules to dampen home sales beyond Toronto and Vancouver, banks say
Finance Minister Bill Morneau announced “three complementary measures designed to reinforce the Canadian housing finance system.” Among the changes, the government will close a loophole that allowed foreign buyers who are not residing in Canada to purchase property here, then sell it at a profit — all the while escaping federal tax on whatever money they make in the flip.
The federal government will also bring in a more rigorous mortgage rate stress test for all insured borrowers in an effort to make sure they can sustain interest rate hikes or income losses, Morneau said.
According to Royal Bank of Canada senior economist Robert Hogue, the changes “have the potential to temper activity across all markets in Canada.”
The stress tests essentially means that new buyers will have to prove to lenders that they can make mortgage payments if the rates are as high as the five-year posted mortgage rates among Canada’s largest banks, which currently average 4.64 per cent, according to the Bank of Canada.
WATCH: Morneau explains what concrete steps government is taking to crack down on foreign homebuyers
“The changes to the mortgage insurance qualifying requirements have the potential to exert the most significant effect on Canada’s housing market in the near term,” Hogue said in the report. “Imposing a higher qualifying rate on insured mortgages with a five-year term will affect the largest segment of Canada’s mortgage market.”
Hogue explained that just over 75 per cent of new mortgages in Canada last year were fixed rate and most were for a five-year term. He noted that using stress tests at the posted rate of 4.64 per cent, “would raise the bar for mortgage insurance qualification.”
“Because they tend to be the primary users of mortgage insurance, first-time homebuyers necessarily would be the most affected by the change,” the economist said in the report. “It is important to note that these changes will have implications not just in Vancouver and Toronto but all across Canada.”
In August, the B.C. government rolled a 15 per cent foreign-buyer tax to help cool the housing market on the west coast.
On Tuesday, the Real Estate Board of Greater Vancouver said home sales in Metro Vancouver in September fell by 32.6 per cent compared to the same month last year.
According to Bank of Montreal Capital Markets senior economist Sal Guatieri, the new real estate rules will also help reduce the risk of a sharp housing correction in booming markets.
“If the measures do what they are intended to do — slow the Vancouver and Toronto markets, and dampen household credit growth — the Bank of Canada might feel more at ease knowing a rate cut won’t throw another log on the fire,” Guatieri said in a report. “But we still believe the bar for easing policy is pretty high … likely requiring another lurch down in exports and the economy, and upturn in the jobless rate.”
The new mortgage stress test conditions come into effect on Oct. 17 and will apply to new mortgage borrowers.
–with a file from Andrew Russell
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