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Jonathan Coe makes sushi in his Parkdale apartment on Queen West in Toronto, July 8, 2013. Mr. Coe is unable to buy a condo due to last year’s mortgage changes made by Finance Minister Jim Flaherty. (J.P. MOCZULSKI for The Globe and Mail)
Jonathan Coe makes sushi in his Parkdale apartment on Queen West in Toronto, July 8, 2013. Mr. Coe is unable to buy a condo due to last year’s mortgage changes made by Finance Minister Jim Flaherty. (J.P. MOCZULSKI for The Globe and Mail)

real estate

The soft-landing squeeze: Ottawa’s mortgage fixes one year later Add to ...

Jonathan Coe is anxious to get out of his west-end Toronto apartment and into his first house, but that dream was put on hold again last year when the federal government changed the rules.

Seun Olowolafe, on the other hand, who is articling now, plans to move out of his parents' Toronto-area home and buy a three-storey loft while mortgage rates, though rising, are still low. His brother is helping to lock him in with a mortgage broker, and the property will be ready next year.

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Such is the nature of Canada's housing market, which cooled over the past year as new mortgage rules knocked out many potential buyers, but, amid low rates and a stronger employment outlook, remains attractive to those who can afford it.

The measures brought in by Finance Minister Jim Flaherty, exactly one year ago Tuesday, were designed to slow the residential real estate market and head off a crash. The measures essentially eliminated the 30-year mortgage, contributing to a cooling market and rippling through to the country's banks.

Those changes have been praised for preventing a bubble, though some argue the market was already flattening, and could be in for a harder-than-expected landing when interest rates rise.

Mr. Coe, a self-employed website developer, is almost 40 and single, and wants his own home. He has not been completely thrown out of the game just yet, however, and is once again researching the market and talking to an agent.

"I'm finding that what's in my price range when I look is either really cramped one-bedroom condos or studio spaces that I don't find very appealing," Mr. Coe said.

"I would rather wait and save and purchase a larger space, and I'm now open to partnering with somebody. If you can combine the mortgage power of a couple of people or with an investor with history, then all of a sudden you are able to look at properties that are listed for maybe the $650,000-to-$800,000 range. I think if I was to get into a house, that's probably the only way it's going to happen. Either that or I'll have to find and marry a rich girl."

It is potential buyers like Mr. Coe who were pushed out of what had been a red-hot market, partly by Mr. Flaherty's tightening of the rules.

The measures made 30-year mortgages ineligible for basic, mandatory mortgage insurance, reducing the maximum amortization period to 25 years. Any mortgage involving a down payment of less than 20 per cent (so called high loan-to-value mortgages) must be insured, meaning Mr. Flaherty's move priced many lower-income first-time buyers out of the market. Bank of Nova Scotia estimates the measures reduced the pool of home buyers by 10 per cent.

Douglas Porter, chief economist at Bank of Montreal, said the changes have so far had the desired effect of engineering a soft landing for the housing market. But extremely low interest rates offset the move.

"It definitely softened the blow. I think there's no question that the change in the rules did take some serious steam out of sales," Mr. Porter said. "But it looks in recent months that the market had gradually absorbed that change in rules and was actually beginning to firm again."

Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals, argues that the market was already slowing before Mr. Flaherty's tightening. He says the current buoyancy - with what he predicts will be "surprisingly high" sales numbers next week from the Canadian Real Estate Association - only reflects buyers rushing in to the market before mortgage rates shoot upward.

"What's going to be more interesting is what happens after that rush ends," Mr. Dunning said. "Are we going to a reassertion of the slowdown we've had over the past year?"

The slowdown in home sales was felt by the banks, which account for over 70 per cent of the residential mortgage market. Before the federal government acted, the banks' mortgage books were growing handsomely. However, their latest sets of financial results, from May, show that new mortgage clients were harder to come by.

Some banks lowered their mortgage rates earlier this year and enticed customers with discount deals south of 3 per cent. Banks could afford the fire-sale rates because residential mortgages are priced off a spread over the government's five-year bond yield, which dropped to just 1.15 per cent this spring.

Now the tide is turning, with yields rising. The five-year Canada bond now yields 1.8 per cent, and that has forced banks to jack up rates.

Canada Mortgage and Housing Corp. says it expects housing sales to slow this year but increase in 2014, with price increases at or below inflation.

Dianne Usher, president of the Toronto Real Estate Board, says first-time buyers are still finding their way into the city's expensive real estate market. More boomer parents are helping with down payments, she said, and some buyers are deciding to go with smaller homes, in less pricey areas: "I'm seeing them become a little bit more creative," she said. "... It just got people thinking again, and it got people being a little more typical Canadian cautious. And that's not a bad thing."

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