New federal mortgage rules are creating a "policy ceiling" that will curb Toronto's soaring house prices this year, measures that would be partly offset by another Bank of Canada rate cut, the local real estate board said in a new forecast.
Average housing prices in the Greater Toronto Area (GTA) jumped nearly 10 per cent last year to $622,217 as more than 101,200 properties changed hands on the resale market, setting a new record for the region.
Whether mortgage rates rise or fall this year could mean the difference between another record-breaking year for Toronto's real estate market or more subdued sales, the Toronto Real Estate Board said. It predicted price growth would slow to between 5 per cent and 7 per cent this year.
In forecasting a modest cooling for price increases, the board pointed to recent moves by Ottawa to increase down payment requirements for insured mortgages on expensive properties, along with a proposal by the Office of the Superintendent of Financial Institutions to require lenders to hold more capital against some mortgages.
Both changes will likely mean borrowers who struggled to afford the minimum down payment will put their purchasing plans on hold, while lenders will get stricter with mortgage approvals, helping to keep price growth in check this year. "In effect, there will be a 'policy ceiling' on price growth," the board said.
More than 40 per cent of existing home sales in the GTA last year were in the $500,000-to-$1-million price range that will see the required minimum down payment jump from 5 per cent to 10 per cent starting next month. That would increase the minimum down payment by $6,111 for buyers purchasing a home at the average price of $622,217.
But the vast majority of those buyers had down payments higher than 10 per cent, the board said. The new rules are expected to target just 9 per cent of buyers purchasing housing between $500,000 and $700,000 and a mere 4 per cent of those purchasing housing between $700,000 and $1-million.
Changes to mortgage rates will also have a significant effect on the Toronto market this year.
Several major lenders have increased mortgage rates in recent weeks, a move driven largely by the rising cost of funding for banks. The market consensus is for five-year Government of Canada bond yields, which influence fixed-rate mortgages, to rise another 0.20-to-0.30 percentage points by the end of this year. That would amount to an increase of less than $100 a month for a typical mortgage payment on a house with an average price of $622,217, the board said. But it would be enough to push annual housing resale activity down by nearly 5 per cent to 96,500 transactions. Average prices would grow by just 5 per cent to $655,000.
But with many now expecting another Bank of Canada rate cut this year, the board predicted mortgage rates could actually fall. That would send existing housing sales soaring nearly 4 per cent to a new annual record of 105,000, with only a lack of available listings to curb sales. In that case, prices would grow by 7 per cent to $665,000.
"Under either of these scenarios, the great majority of households that could purchase at the end of 2015 will still feel comfortable purchasing and paying for their home over the long term at the end of 2016," the board said.