I saw this on Bloomberg Business at the end of business day on Wednesday, no doubt in response to the Bank of Canada holding the overnight lending rate steady.
I’m not sure if there’s any merit to this story, or if it’s just speculation, since nobody in government is really talking, and no sources were named.
But I’ve talked to a couple mortgage brokers and economists who say that indeed, this idea has been tabled, and it’s not that much of a long-shot after all.
However, the idea of a “two-speed” housing market in Canada really has to be considered before any new policy is written…
First, take a look at this wire from Bloomberg Business:
Canadian government officials are pushing for tighter housing finance rules to cool soaring real estate markets in Toronto and Vancouver, according to people familiar with the plans.
The finance department recommends raising the minimum down payment on insured mortgages to as high as 10 percent from 5 percent for homes above a certain value, the people said on condition they not be identified because the deliberations aren’t public. Former Finance Minister Joe Oliver rejected the recommendation earlier this year. Department officials raised the proposal again at an October meeting with industry, according to one of the people.
Finance Minister Bill Morneau, who replaced Oliver after the October elections, has said the housing market was among the first issues department officials briefed him on. The new Liberal government will need to decide whether the nation’s C$1.3 trillion ($970 billion) mortgage market needs tighter regulations to prevent a housing crash.
Toronto and Vancouver home prices remain on a tear and are perceived by some economists to be overvalued. That puts policy makers into a delicate balancing act: how to cool markets in those cities without precipitating a major decline in places like Calgary or Montreal, where prices are flat or falling.
Jack Aubry, a spokesman for Finance Canada, said the department doesn’t “comment or speculate on possible policy actions, or discuss what might be under consideration.”
In a bid to target the more costly markets earlier this year, Oliver considered raising the required minimum down payment, currently 5 percent, on homes worth more than C$500,000. He ultimately rejected the proposal, one of the people said. His department, which had recommended the measures be applied immediately, initially recommended an even lower threshold on concern C$500,000 wouldn’t have much of an impact, the person said.
Vancouver housing prices have soared, boosted by an influx of foreign buyers. November sales were the second highest on record for the month, with the average price for a detached home jumping to almost C$1.6 million, according to figures released Wednesday.
Under Canadian rules, home buyers must have a minimum 5 percent down payment to qualify for mortgage insurance. Buyers putting at least 20 percent down aren’t required to take out insurance.
Morneau hasn’t said whether the government will enact any new housing measures.
Okay, so there’s not really anything concrete in there, other than:
1) Anonymous, unidentified “people” in government say that officials might be pushing for higher down payment requirements.
2) This idea was already shot down by Joe Oliver earlier this year.
But the news reports and the idea have people in and around real estate buzzing, and a colleague asked me, “Do you think this would have an effect on the market?”
How much of an affect is the bigger question though, and in what part of the market would we see the greatest change.
Personally, I think we’d see the biggest effect in the entry-level buyer segment of the market, which sadly, is up to $400,000 right now in Toronto, but could represent a 4-bed, 5-bath mansion in some other parts of the country!
Many of my first-time buyers have only 5% down, plus closing costs.
Think of the buyer who wants to purchase a $300,000 condo, with $15,000 down (and with first-time buyer rebate on land transfer tax, they’d only pay about $975).
We’re not here today to debate the merits of this purchase, short-term or long-term, but we may as well state that this $285,000 mortgage would carry for $1,323.71 per month, of which an average of $686 per month comes back to the buyer in the form of principal in year one.
Factor in about $350 per month for maintenance fees, and $150 per month in taxes, and this unit costs the buyer $1,137.71 per month as a sunk cost, which is far less than the unit would rent for.
Ha. Well, I said we wouldn’t get into the merits of the purchase, but, well, I couldn’t resist…
In any event, that buyer has the “right” to pay $1,137.71 for that unit today, rather than rent it for $1,500, since that buyer can purchase with a 5% down payment.
But if the minimum down payment was increased from 5% to 10%, that buyer would need $30,000 as a down payment, rather than $15,000.
If that buyer didn’t have the $30,000, then he or she would be forced out of the market.
There goes that “right” to pay less for the unit, although the bears will be quick to cast doubt on whether that’s a worthwhile venture to begin with.
So by increasing the minimum down payment from 5% to 10%, we’re going to see the biggest effect at the lower-end of the market, and that’s because this is where the most five-percent-down buyers are found.
Do buyers purchase $800,000 houses with 5% down? They sure do!
$40,000 down, and if you can carry $3,500 per month, it’s all yours!
To each, their own. And some people make fantastic incomes and can easily carry the monthlies, but don’t have the down payment.
I had two clients recently purchase for $850,000 with 5% down. The mortgage amount seemed massive, but their combined income was over $250,000. They’re both professionals, who paid off massive loans that accumulated as they went to school into their early-30’s, but are now in their “earning years” and it didn’t take them long to save the $40,000.
I had another client, who would love if I referred to him as a “young hot-shot,” who could probably have put down 50% on his $925,000 bachelor pad, but he said, “Why wouldn’t I take this 2.59% interest rate, plus modest CMHC premium, as far as it’ll go, and then invest the rest?”
Although I disagree with his assessment that he can make 10% “risk free,” if he has an “in” at his place of work that can see him earn double-digit returns, then I suppose it makes no sense to use that money at 2.59%.
Now let’s throw another log onto the fire: what if the “increase to 10% worked on a sliding scale?
Robert McLister posted this sliding scale on his blog the other day:
- 5% down for $0 – $500,000
- 7% down for $500,001 – $700,000
- 10% down for $700,001 – $999,999
- 20% down for $1,000,000+
That certainly changes things, does it not?
Now all those poor, unfortunate, would-be first-time condo buyers in Toronto, with their $15,000 savings, still can buy a condo and reap the rewards of paying less than the cost of rent!
So maybe the only affect this policy change will have may be in the $700,000 – $1 Million range?
At the end of the day, we have to remember that this policy is not being enacted in Toronto, but rather for the whole of Canada.
And while we Torontonians live in one of the hottest real estate markets on the planet, surely we have to take notice of what’s going on outside the Golden Horseshoe, no?
I’ve talked to some people who believe that we are in a “two-speed housing market” here in Canada, with Toronto & Vancouver going one speed, and the rest of the country going another.
This policy would be implemented to cool the “Canadian” housing market, and while Toronto and Vancouver are the target, clearly it would have an effect on every other city and town as well.
So what does the “two-speed housing market” look like?
(Charts are all courtesy of Ben Rabidoux from North Cove Advisors)
You simply can’t talk about “Toronto’s housing market” in the same breath as “Canada’s housing market,” as it’s far more drastic than comparing apples to oranges.
Some areas of the country are already bleeding red, and this policy change for increasing the minimum down payment requirement would only sink them further.
The reason why Toronto and Vancouver’s markets have been increasing for the past twenty years, and why, more specifically, they continue to increase today even though logic “should” have dictated they’d cool already, is simple: supply and demand.
Active MLS listings in Ontario and British Columbia are lower than they’ve been all decade, and this is even with the supposed construction boom:
Now what does the same picture look like for the rest of Canada?
Listings are at all all-time high.
Our housing market is going at two very different speeds, depending on where you live.
A change from a 5% minimum down payment to a 10% minimum down payment might cool the market in Toronto in Vancouver, ever-so-slightly, but the prospects for the rest of the country wouldn’t be good.
It’s not my decision to make, and call me biased, but I’d prefer at the moment to simply leave well-enough, alone…