The federal government is throwing some cold water on Canada's overheated housing market, hoping to keep Canadians out of unaffordable debt and slow down foreign investment in Toronto and Vancouver's real-estate markets. Here's a guide on what has happened so far, what it means and what's next.
Earlier this month, Finance Minister Bill Morneau announced a major shakeup of Canada's mortgage and foreign-ownership rules for real estate. Some of those rules begin to take effect today. There are four big changes involved, The Globe's Bill Curry explains:
1 Expanding stress tests to all insured mortgages, not just mortgages in which the buyer has put down less than 20 per cent of the purchase price. This may make it harder for some buyers to get insured mortgages, even if they make a larger down payment, because it ends a two-tier system where some mortgages were weighed differently against the buyer's income to see whether the mortgage is affordable. (To illustrate the difference in dollar terms, here are three scenarios and the maximum purchase prices that would be insured in each under the old and new rules.) Some buyers may be exempt from the new rules, though; here's Rachelle Younglai's explanation (for subscribers) of who's exempt and who's not.
2 Closing a tax loophole that some foreign buyers have used to claim exemptions in capital-gains tax for selling properties that they falsely claim as their primary residences. Now, home buyers must file taxes in Canada, as a resident, the same year they buy a home, before they can later claim the principal residence exemption on any gains for that year.
3 Launching consultations to see if banks can take on added lending risks, which would lighten Ottawa's obligations to pay for insured mortgages in the event of a housing crash – but could also lead to higher mortgage rates. (Here's an explanation of the three scenarios Ottawa is proposing and how lending institutions can give their feedback on them.)
4 Changing the restrictions on portfolio insurance, a type of bulk insurance for mortgages with down payments of 20 per cent or more.
The measures got the thumbs-up from Bank of Canada officials who said on the week of the announcement that the changes would help ease risks on the nation's financial system.
Rachelle Younglai spoke with first-time home buyers ( story for subscribers) to see how they saw the changes affecting them. Here's how 35-year-old Michael Mikhail of Toronto felt:
This is a big blow. I will get approved [for a mortgage] because I have decent savings and a good job, but they will give me a lot less.
Why are they doing this?
To crack down on foreign real-estate speculation: Investigations by The Globe and Mail over the past year have also shed light on how local and foreign buyers have been flipping Vancouver-area homes for profit, buying and selling properties in the names of relatives or corporations and collecting tax windfalls in the process. In B.C., fears of wealthy foreign buyers inflating Vancouver's sky-high housing prices have led to tougher restrictions on how the market is regulated and taxed provincially (more on this below); now Ottawa is hoping to close the federal tax loopholes too, a move met with cautious optimism by the B.C. government.
To keep Canadians out of debt: Mr. Morneau hopes that applying the same stress test to all high-ratio mortgages will make prospective home buyers think twice about taking on more debt than they can pay for. "We want to ensure that we have measures in place to help them to take on risks that they can afford, especially in the situation where mortgage rates go up or their family income goes down," Mr. Morneau said in an interview with The Globe. Analysts are worried that Canada's housing markets, especially Toronto and Vancouver's, are unsustainable: On Oct. 26, the CMHC is set to issue its first-ever "red" warning for the housing market, with CEO Evan Siddall warning that, when home prices and debt levels are high, economic contractions usually follow.
To keep Ottawa off the hook: The federal government currently assumes the full cost of insured mortgages in the event of defaults. Mr. Morneau's changes would mean Ottawa would pay less, and banks might pay more – as much as 15 per cent, according to the Finance Department's proposal. Those are costs that the banks might pass on to homeowners by raising rates. The changes to low-ratio mortgage insurance would put the government in less risk in markets with lots of residential mortgages worth $1-million or more, such as Vancouver and Toronto.
What have provinces been doing?
JOHN LEHMANN/THE GLOBE AND MAIL
The federal government is part of a task force along with the B.C. and Ontario governments that is looking at housing prices in the Toronto and Vancouver areas. Here's what those provinces have been up to in their own jurisdictions:
British Columbia: This summer, Premier Christy Clark's government began more rigorous tracking of home buyers' nationalities and instituted a 15-per-cent tax on home purchases in Metro Vancouver that involve foreigners. The number of foreign-involved transactions plummeted once the tax took effect on Aug. 2; more Vancouver housing numbers released on Tuesday showed a further drop in property sales in September. But Canada Mortgage and Housing Corp. cautioned in an October report that foreign investment is only one facet of Vancouver's ultra-hot housing market, and it's too early to tell if the B.C. tax has made a difference.
Ontario: Premier Kathleen Wynne says the province needs more information about the factors behind Toronto's red-hot real estate market before adopting a foreign-buyer tax like B.C.'s.
What else has Ottawa already done?
The federal government's most recent measures come after years of fine-tuning Canada's housing laws in the aftermath of the 2008-09 financial crisis. Here's what Justin Trudeau's Liberal government and the Harper Conservatives before it have already done so far:
Feb. 15, 2016: The minimum down payment for new government-backed insured mortgages increases from 5 per cent to 10 per cent for the portion of a house price over $500,000.
July 9, 2012: The maximum amortization period for new government-backed insured mortgages drops to 25 years from 30 years. Ottawa lowers the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent and stops offering insurance on mortgages for homes worth more than $1-million, instead requiring borrowers for such homes to make a minimum down payment of 20 per cent.
April 18, 2011: Ottawa withdraws government insurance backing on lines of credit secured by homes, such as home equity lines of credit.
March 18, 2011: The maximum amortization period for government-backed insured mortgages is cut to 30 years from 35 years and the maximum amount Canadians can borrow in refinancing their mortgages is reduced to 85 per cent from 90 per cent of the value of their homes.
April 19, 2010: Ottawa introduces a requirement that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. The government also lowers the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes and requires a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties bought for speculation.
Oct. 15, 2008: The maximum amortization period for new government-backed mortgages is fixed at 35 years and a requirement for a minimum down payment of 5 per cent is introduced. Ottawa also establishes a consistent minimum credit-score requirement and introduces new loan documentation standards.
What happens next?
The new stress-test rules came into effect for borrowers on Oct. 17. While several economists don't fear a housing meltdown as a result of the new rules, some effects may be felt immediately. Royal Bank of Canada's Robert Hogue predicts it will "harden" the landing as the markets shift, Michael Babad reports.
Here are some other important dates to watch out for as the changes come into effect:
- Nov. 30: The new rules for low-ratio mortgages come into effect.
- Feb. 28: This is Ottawa’s deadline for feedback from lending institutions on possible risk-sharing in the mortgage industry.
- April 30: For most Canadians, this is the deadline day for filing taxes. The new housing rules affect when you have to declare the sale of your home to the government.
Will this actually work?
RAFAL GERSZAK FOR THE GLOBE AND MAIL
When it comes to housing prices and sales, we won't know for a while what effect Ottawa's latest measures will have, or whether they're working as the Trudeau government intends.
Not all the factors behind Toronto and Vancouver's high prices – like the shortage of single family houses in those cities, or global trends that drive foreign investment in real estate – are within the federal government's control, The Globe's Barrie McKenna explains, and mortgage stress tests may not be a sufficient fix.
Here's Kathy Tomlinson and Mike Hager's report on what some real-estate experts predict will happen after the federal changes take effect. Over time, monthly housing reports will also paint a clearer picture of how they're affecting home buyers' bottom line across the country. To see how the market is shifting in your city or neighbourhood, get the latest numbers and analysis from The Globe's house-price data centre.
With reports from Bill Curry, Tamsin McMahon, Rachelle Younglai, Kathy Tomlinson, Mike Hager, Barrie McKenna, Adrian Morrow, Michael Babad and The Canadian Press
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