The wobbly Toronto real estate market may have more trouble finding its footing now that buyers who take out an uninsured mortgage face a more stringent "stress test," industry watchers warn.
Real estate agents, economists and mortgage brokers predict more potential purchasers will put off buying a property or drop out of the market all together after the new lending rules take effect on Jan. 1.
Before that date, agents predict a small flurry of buying as people rush to ink a deal before the new requirements come into effect.
The Office of the Superintendent of Financial Institutions, which regulates the banking industry, unveiled a final version of the new guidelines this week. The federal government agency has been working on proposed Canada-wide changes for several months now while consumers continue to binge on debt.
"The final decision to forge ahead with proposals to tighten mortgage rules further will only make matters worse for the already faltering housing market," says David Madani, senior Canada economist at Capital Economics.
The OSFI's new rules will require buyers who are applying for a mortgage with a down payment of more than 20 per cent of a property's purchase price to qualify at the greater of the five-year benchmark rate posted by the Bank of Canada or an interest rate two percentage points higher than the buyer's negotiated rate, whichever is higher. So if a buyer has negotiated a rate of 3 per cent, for example, they must have the financial health to meet their payments if the rate rises to 5 per cent.
Lenders already apply a "stress test" to borrowers who have a down payment of less than 20 per cent because they are required to have mortgage insurance from Canada Mortgage and Housing Corp.
Mr. Madani points out that, while insured mortgage lending has slowed over the past 12 months, uninsured mortgage lending has increased dramatically.
OSFI superintendent Jeremy Rudin says his mandate is to ensure that federally regulated banks have sound lending practices.
Ira Jelinek, an agent with Harvey Kalles Real Estate Ltd., anticipates the guidelines will have wider reverberations than intended.
In his opinion, the rule changes will have a larger impact than the two recent interest rate hikes by the Bank of Canada and the foreign buyers' tax implemented by Ontario's provincial government.
He says professionals and small business owners often have problems obtaining a loan because they pay themselves a relatively low salary while retaining assets in the business. In the past they've been able to use a chunk of cash to make a larger down payment and avoid the stress test but, under the new policy, they will need to undergo the more rigorous test.
Mr. Jelinek acknowledges that the rules may prevent unsteady consumers from buying more house than they can afford and he is in favour of tighter regulations but he believes the OSFI's threshold may be too high. He adds that small business owners – a category that includes real estate agents – may have to buy less expensive properties or not buy at all.
"It's going to eliminate a lot of buyers," says Mr. Jelinek. "It's a good stress test to have, but they're not taking into consideration people who run their own businesses."
Another cohort that could be affected is the group of young buyers who receive a down payment from the bank of mom and dad. In many cases, parents will help young adults buy a place if the kids can manage the monthly carrying costs. While a 20 per cent down payment would have let them obtain a mortgage, they may have more difficulty qualifying in the future.
"It's so hard for some people to qualify already," Mr. Jelinek says.
He believes that renovations may become more popular as homeowners use their home equity to improve an existing property rather than attempting to move up to a more expensive home. As sales slow, people who need to move may see their property languish on the market. "It's going to put a lot of families in jeopardy who need to move up or move down but can't sell their house any more."
So far this fall, the return of a more balanced market in the Toronto area is helping prices to stabilize, says Bank of Nova Scotia economist Adrienne Warren.
Two consecutive months of rising sales in August and September confirm that buyers are surfacing again after the Government of Ontario implemented policy changes in April, Ms. Warren says.
Sellers in the Toronto area also seem more confident, she points out, with listings rebounding sharply last month, according to numbers from the Canadian Real Estate Association.
The sales-to-new-listings ratio fell to 45.8 in September, leaving the market on the edge of buyer's territory, she says.
Benchmark prices edged up only slightly in September from August, she says, with the more affordable semi-detached houses, townhouses and condo units seeing the bulk of the action.
Scanning the country as a whole, the housing market seems healthy at the start of the fall buying season, Ms. Warren says. Borrowing costs are still low and job growth is robust. At the same time, there's good balance between the economies of various regions and people are forming new households.
Still, there could be some speed bumps ahead, including the revised OSFI rules. Ms. Warren also expects to see higher interest rates, which in turn could lead to a pullback in sales – especially in high-priced cities.