One last gasp for the Canadian residential market as rule changes cloud 2018 outlook
Realtors are predicting a busy Christmas selling season as homebuyers rush to beat the latest deadline designed to further cool the market
Veteran mortgage broker Vince Gaetano figures the residential housing market this Christmas might be the busiest holiday season ever as people make one last push to squeeze into the housing market before tighter mortgage restrictions come into effect.
But it could also be the last gasp for the resale market. Changes coming from the federal banking regulator on Jan. 1, 2018, take dead aim at a section of the market that until now has been mostly exempt from government regulation: low-ratio buyers, or people with down payments of 20 per cent or more.
Starting next year, the Office of the Superintendent of Financial Institutions will require those prospective homebuyers to qualify based on either the Bank of Canada posted rate for the five-year fixed rate product or two percentage points above their contracted mortgage rate, whichever is higher.
“We are going to see people trying to get the maximum available,” said Gaetano, a principal at monstermortgage.ca, which is one of the largest independent mortgage brokers still in the market. “If my wife has anything to do with it, I will be taking off Christmas, but I have this feeling we are going to be busy.”
The rule change by OSFI is just the latest attempt to slow down the housing market. Previous attempts include a 15-per-cent tax on foreign buyers in Vancouver and Toronto, the country’s two most expensive cities for housing, a year-old move to reign in buyers with less than 20 per cent down and tougher stress tests required for everyone.
The question for the real estate industry in 2018 might be: Who will be left to buy homes?
“The only people unaffected are people who don’t need mortgage financing, because now you have captured the entire market,” said Gregory Klump, chief economist at the Canadian Real Estate Association.
In other words, people buying with “cash,” as realtors like to describe no debt transactions, are the only ones unscathed.
CREA’s next forecast is due out in December and Klump won’t say what it will predict, but there is little doubt what direction he thinks the market is pointed in now.
“I’d be very surprised if 2018 is not materially lowered,” he said, referring to the forecast for housing prices and sales.
Until then, however, he sees a major bounce in activity as consumers rush to beat the deadline for OFSI’s latest rule change, which could end up costing homebuyers about 20 per cent of their purchasing power.
“There will be some pull forward of sales,” says the economist, adding that by January sales will have dried up and then it will take some months for the market to stabilize.
How strong the last-minute buying push is will also depend on how OSFI’s wording of the deadline is interpreted.
In a conference call with journalists this month, Jeremy Rudin, the regulator’s superintendent, said the deadline was Jan. 1, 2018, but lenders say it’s not exactly crystal clear what the regulator means in its briefings on the subject.
“Loan applications occurring between October 17, 2017, and January 1, 2018, might be subject to the new rules, depending on the institution, because as mentioned in the annex to our letter, where possible, institutions are encouraged to comply with the new rules as soon as they can,” a spokesperson from OSFI, explained in an email.
I’d be very surprised if 2018 is not materially lowered
One thing that is clear is that OFSI’s deadline is tied to when a financial institution extends the mortgage loan, not when the transaction takes place. As a result, some brokers are expecting a wave of consumers seeking pre-approvals in the final quarter of this year.
Another factor that might also affect the market in 2018 is a loophole that OSFI seems to have purposely left intact that allows consumers to qualify based on a longer amortization, which could be extended to 35 years.
In the high-ratio market, where consumers have smaller down payments, amortizations are limited to 25 years.
In the low-ratio market, there is nothing to say consumers cannot amortize a loan over 35 years, a move that effectively wipes out the higher qualification rate and gives those buyers the same level of buying power — and debt — they currently enjoy.
It’s unclear if financial institutions will take advantage of this loophole, because they risk upsetting the regulator if they do.
But Klump said the effect could be exactly the opposite of what Ottawa policymakers want, which is to rein in an average household debt that is at an all-time high of 167.8 per cent of disposable income.
“It will mitigate the impact (of the latest OSFI changes), but it will keep people in debt longer unless they prepay or accelerate payments,” Klump said.
Craig Alexander, chief economist at the Conference Board of Canada, said all the recent rule changes now cover all borrowers getting mortgages from OFSI-regulated institutions, but added that it is key that the changes happened over time.
“We’ve had a steady adjustment in the regulatory environment to lean against imbalances and we’ve reached a point where the regulatory effects are impacting the market as a whole,” Alexander said. “The reason why it is not having a greater impact on the market is it has been delivered in an incremental fashion over many years.”
If the government had implemented all the changes at once, he said, “we would have had a very severe housing correction on our hands.”
Alexander said the housing market is a bit like driving on a highway where the road suddenly becomes icy: everybody knows “you don’t slam your foot on brakes” or it ends up causing an accident. Instead, you take your foot off the gas.
His prediction is that homebuyers will lower their price point.
“People who want to buy real estate are not about to stop buying, but they will move down to what they can afford,” Alexander said. “This is all prudent, because you are insulating the market from interest rates and when they return to more normal levels.”
People who want to buy real estate are not about to stop buying, but they will move down to what they can afford
The rising rate environment certainly has some in the market scared of what might happen.
The Bank of Canada may be focused on slowing the overall economy, but two interest rate hikes since the summer have already made credit more expensive for variable rate mortgages tied to the prime rate, which tracks the central bank’s overnight lending rate. At the same time, long-term rates also continue to rise.
Despite the breadth and depth of the recent homebuying rule changes, Doug Porter, chief economist at Bank of Montreal, said move-up buyers are still out there to give the housing market a boost since most of them have already established equity.
“But even at the entry level, Canada is still a huge magnet for international immigration,” he said. “You may not have non-resident speculators, but you still have a lot of people moving into the country. And that’s the single most important source of new buyers.”
In the interim, real estate agents are moving into high gear.
“I’m trying to get my clients pre-approved now,” said David Batori, the broker of record at Toronto-based Re/Max Hallmark Batori Group Inc.
He said a lot of first-time buyers who can get together a 20-per-cent down payment now will be affected, but in some parts of Toronto, at least, there’s still a lack of inventory, which makes it hard to find affordable housing in any case.
“There will be a rush to beat this deadline,” Batori added. “If there is the product to sell at the end of the year, I will be working. It will be slow in January, but people will adapt.”
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