What a difference a week makes.
The new
Liberal government is making its voice heard loud and clear with respect
to the Canadian housing market and its concerns about an overheated
housing market in certain cities in Canada.
By
increasing down payment requirements for properties greater than
$500,000 the Minister of Finance, Bill Morneau took the position that,
“The actions taken … prudently address emerging vulnerabilities in
certain housing markets, while not overburdening other regions.”
While the industry knew changes were being considered, only a few would have bet on the speed with which they were delivered.
It
is important to understand that increasing down payments has been
talked about for many years and the results could have been much more
severe. I suppose, at its core, down payment minimums could simply have
increased to 10% across the board. In presenting it this way the
Minister has recognized geographic market differences. Please refer to
the chart below for a simplified display of the extent of the change
(showing that its maximum impact is increasing down payment to 7.5% for
homes valued at $999,000, or $25,000)
Without
a doubt the real estate sector, including the mortgage market, remain
top- of-mind with our new finance minister. This change, along with some
proposed changes from OSFI related to lender capital requirements, and
CMHC changes related to guaranteed
fees in the mortgage-backed securities market will surely lead to incremental costs for our mortgage funders.
These two additional
changes seemed
to have been timed to bring about a series of changes at the same time,
which taken together, are designed to curtail a rising housing market.
It is important that we are as aware of them as we are of the down
payment increase.
When funding costs for our
lender partners increase, they are likely to be passed along to
consumers in the form of higher rates. These increased direct costs to
consumers, in the form of higher down payment requirements, combined
with higher funding costs will certainly impact affordability on the
margin. In doing so, the government is hoping it will create more
balance in the market – perhaps by slowing it down in certain areas.
And
while the intended ‘targets’ were likely Toronto and Vancouver, CIBC
deputy chief economist, Benjamin Tal wrote a report that showed the
unintended consequences may be felt more in cities such as Calgary,
Victoria, Edmonton and Hamilton as those cities have a higher percentage
of high ratio sales between $500,000 to $1M. That said, overall impact
is estimated to be less than 3.5% of the market.
For
more than half a decade we have been working though times of increased
regulation and oversight. Some of those changes have brought about the
increased use of secondary and private lenders for some, and increased
down payment requirements for others. And while costs may have increased
on the margin for some, ultra low interest rates along with a high
degree of consumer confidence have buoyed housing markets in many
markets across the country.
For years we have
advocated government and policy makers to tread carefully around broad
stroke changes to increase down payments. Given the government’s intent
to make this policy change I am pleased to see that it was done on the
margin and took into consideration regional market realities. The
Department of Finance has drafted the following FAQ for more context.
While
our initial reaction is always concern, I think it’s reasonable to
estimate that these changes will not dampen the real estate markets to
the point of collapse. In fact, we will continue to operate in a very
robust and confident lending environment.
As
we are assessing this latest change, it’s important to remember there
are still a number of very important items on the radar as it relates to
potential changes in mortgage regulations. These include foreign
ownership in a broad sense and Canadian residents buying investment
properties. Since both of these items already require at least 20% down
payment, other levers may be evaluated as a means to influence the
market.
Mortgage brokers save consumers money,
whether or not they use a broker. That is because competition breeds
responsiveness. Even though we are living through a period of heightened
regulatory oversight, the broker channel continues to grow. The reason
is that consumers need and value our experience and expertise to
navigate the mortgage landscape, ultimately sourcing them the lender and
product best suited for their financial need.
If you are a mortgage consumer reading this, I urge you to contact your mortgage broker today.
