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.