Governments put the brakes on housing sector

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant, Peter Dolezal is the author of three books

This year, 2016, has seen our governments, at all levels, implement new requirements designed to put the brakes on the housing sector – particularly in the super charged Toronto and Vancouver markets:

 

In February, the Federal Government announced new rules for down payments

on high-ratio mortgages, on properties valued between $500,000 and $1 million. Previously, with sufficient income, a buyer could qualify for a high-ratio, insured-mortgage with only 5 per cent down. The new rules increased the down payment to 10 per cent on that portion of the purchase price which exceeded $500,000.

 

Effective Aug. 2, the BC Government introduced an extra 15% tax on the purchase by foreign buyers, of residential property in Metro Vancouver.

On Oct. 3, the Federal Minister of Finance announced further tightening actions:

 

The capital gains tax exemption on a principal residence will henceforth be available only to individuals actually residing in Canada in the year of purchase.

A new “stress test” for high-ratio mortgage borrowers, with lenders obliged to apply this new test, effective October 17, 2016. In essence, even were a borrower able to obtain a mortgage at lower rates, he/she will now be required to qualify for the loan, as if borrowing at the posted 5-year fixed rate of the major banks.

The City of Vancouver is contemplating a new “vacant property” tax, which could take effect in the new year.

 

As a result of the new 15 per cent tax, Vancouver property sales to foreign nationals, even before the October 3 announcement, had almost ground to a halt. The total number of property sales also plummeted. Prices have tumbled, and are likely to fall further.

The new mortgage lending “stress test” will hit first-time buyers the most. While applied across Canada, the impact will be the greatest in the high-priced areas, where affordability was a major issue even before this new rule. The first-time buyer has always been the engine that kept the market moving at all levels. Many such buyers across Canada who would have qualified for a high-ratio mortgage under the previous rules, will now have to delay their home purchase until they have saved a larger down payment, or seen a significant increase in family income. This will affect market activity significantly and put the brakes on price increases nationwide. Clearly, the Federal Government is concerned not only with the careening housing price trajectory in a number of regions, but also with the increasing debt levels of Canadian families. They had to act. They have certainly risen to the challenge – very aggressively.

When major policy changes of this nature are implemented, unintended consequences are inevitable. A key impact may well be a major drag on housing markets across Canada which were already balanced, not overvalued, and did not need major intervention.

In past years, government actions which affected the real estate sector could be categorized as fine-tuning. The recent changes are far more significant, and are likely to have much greater impact.

Residential real estate is a major economic driver in every province – most so in B.C.  If the combined effect of the recent Provincial and Federal actions serves as a gentle brake to the real estate sector, the economic fallout will be modest. The risk of course, is that the intended impact will overshoot. This could trigger a major collapse in housing market activity, followed by significant price reversals, and major declines in new construction.

Even were the changes to prove too extreme, and need to be partially reeled back, our governments are to be applauded for acting before a much more damaging housing bubble should develop and eventually burst in Toronto and/or Vancouver.

In Greater Victoria, we may enjoy a partial reprieve from the impact of these changes. Our house prices, though high, are nowhere near the insane levels of Toronto and Vancouver. Additionally, because foreign nationals are not subject to the extra 15% tax outside Metro Vancouver, we may see some leakage of interest from offshore buyers, to our much more reasonably-priced region.

Only time will show how severely these changes will affect buyers and sellers across Canada.

 

 

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his most recent, The Smart Canadian Wealth-Builder.

 

Just Posted

West Shore residents hold forum to voice frustration with Goldstream Park homeless camp

Some 200 residents fill local pub pointing fingers, claiming crime on the rise, safety at risk

North Island Tour De Rock rider Benjamin Leah leads team to Port Hardy

“You don’t have issues and problems when you look at these kids and how much they’re going through.”

City stamps rezoning approval for Merridale Cidery expansion in Victoria

Owner expects doors open by fall 2019 in Dockside Green neighbourhood

Two to hospital after University of Victoria sailing mishap

Wind gusts capsize boat of recreational club sailors

Greater Victoria favourite Pendray Corn Maze opens today

Pendray Farms Corn Maze raises food and funds Sept. 29

Environment Canada confirms Ottawa area hit by two tornadoes Friday

At one point more than 200,000 hydro customers were blacked out

5 things to do this weekend in and around Greater Victoria

Sooke Apple Fest returns, Saanich lights up with lantern festival and anarchists unite for downtown book fair

Whitecaps see playoff dreams fade after 2-1 loss to FC Dallas

Goal in 87th minute seals Vancouver’s fate

B.C. students send books to displaced students of Hornby Island school fire

Maple Ridge elementary school teacher says students learned about acts of kindness

Trump drains oxygen from Trudeau foreign policy with PM, Freeland bound for UN

A lot has changed since the Liberals came to power in Canada in 2015

Emergency crews investigate small sulphuric acid spill in Kootenays

IRM states a small volume of less than one cup and three dime-sized drips were leaked from carrier

Victoria resident barred from trading securities for fraud

Larry Keith Davis used money from an investor to pay personal bills

Family, friends of B.C murder victim want killer sent back to max security facility

Group wants convicted murderer Walter Ramsay sent back to a maximum security facility

Most Read