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Previously only those with less than 20% down were tested, but now all borrowers will be
Canada's top banking regulator has published the final version of its new mortgage rules, which include a requirement to "stress test" borrowers with uninsured loans to ensure they could withstand higher interest rates.
The Office of the Superintendent of Financial Institutions (OSFI) released new guidelines for the mortgage industry on Tuesday. The regulator floated a similar version of these rules earlier this summer in draft form, but Tuesday's release makes them official as of Jan. 1.
Among the major new rules is a requirement to stress test uninsured borrowers. Previously, only insured borrowers had to undergo such a test.
By law, borrowers with a down payment of under 20 per cent for a home must purchase mortgage insurance. Borrowers pay an insurance premium, but the beneficiary is actually the lender, because the insurance protects the loan giver in the event the borrower defaults on the loan.
And the insurance premiums can easily be into the thousands of dollars, on top of the cost of a home, ranging from 0.6 to 4.5 per cent of the mortgage, depending on the size of the down payment and the price of the property.
The Canada Mortgage and Housing Corporation is far and away the biggest mortgage insurer in Canada, although it competes with private rivals Genworth Financial, Canada Guaranty and a few others.
On a $500,000 home with a $50,000 down payment, the CMHC says a borrower would be charged an extra $13,950 to insure the $450,000 mortgage.
The vast majority of first-time borrowers have to purchase mortgage insurance, and they have been obligated to undergo a stress test of their finances since last year.
Anyone who puts down more than 20 per cent of the value of a home doesn't have to pay such insurance, and is known as an "uninsured" borrower — the people affected by the new rules revealed Tuesday.
The stress test itself consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today.
According to the Bank of Canada, the big banks currently have an average five-year posted mortgage rate of 4.89 per cent. But it's not difficult to find a lower rate by shopping around. (Rate comparison website ratesupermarket.ca calculates that many lenders are offering five-year mortgages below three per cent, as does rival RateSpy.com and many others.)
The stress test is designed to simulate a borrower's financial situation by assuming they would have to pay back the loan at the posted average — not whatever deal they were able to negotiate. So under OSFI's new rules, borrowers would be stress tested at either the five-year average posted rate, or two per cent higher than their actual mortgage rate — whichever one is higher.
Notably, the new stress test rules won't apply to mortgage renewals as long as they are with the borrower's existing lender.
The regulator published a draft of its new rules over the summer, before consulting with stakeholders about any changes that need to be made. The regulator said it received more than 200 submissions from people in the industry and members of the public about the rules as they were proposed in July.
The idea's critics, including many in the real estate industry, said imposing a stress test on all buyers would put a chill on the housing market at a time that it can ill afford it.
But OSFI is pressing ahead anyway with changes it describes as "vigilant."
"These revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada," said Jeremy Rudin, OSFI's superintendent.
New rules won't apply to those renewing their mortgage. But everyone else will be stress tested, regardless of whether they are getting an insured or uninsured loan. (JB Reed/Bloomberg)
TD Bank economist Brian DePratto agrees with that assessment, noting "on balance, these changes should help enhance the resilience of the Canadian banking system in a rising interest rate environment."
But that's not to suggest there won't be pain to be had because of them. DePratto estimates that expanding the stress test to all buyers will depress demand for housing by about five or 10 per cent, and there may be a mini-rush to get in before the new rules come in in January.
He believes the housing market's reaction to the last stress test rules in 2016 are a good example of why the regulator felt compelled to act again: As of August, insured mortgages were down 4.5 per cent in the 12 months since they were subject to a stress test.
Uninsured mortgages, meanwhile, grew 17.3 per cent — which suggests homeowners were doing anything they could to get their down payments above the 20 per cent threshold, and away from being locked out of an insured mortgage from failing a stress test.
"Estimates peg the uninsured market at roughly 80 per cent of activity recently, so this measure will bite, arguably more than past changes in the priciest markets," Bank of Montreal economist Doug Porter said.
In practical terms, the stress test would mean that a potential buyer of a $1 million home with 20 per cent down would see their purchasing power knocked down by about 15 per cent, he estimated.
"These changes in mortgage rules represent a further tightening of the screws for the housing market."
Mortgage broker Kim Gibbons with Mortgage Intelligence said she thinks the new rules are a little too strict.
"In the mortgage world, a lot of people are talking about how it's too stringent and the government is tightening up far too much, considering what the delinquencies are in this country for mortgages," she said in an interview.
"And I know that they want to cool the market, but this might put a halt on it."
"I think it's going to be a busy November and December. And I think after that, it's going to cool the market a bit," she said.
Other changes too
In addition to the stress test, the new rules would require lenders to have more scrutiny around the loan-to-value ratio of the loans they give out, to ensure they are not giving out mortgages that are too large compared to the underlying value of the home.
There's also new limitations on so-called co-lending or bundled mortgages that aim to ensure lenders don't flout rules designed to limit how much they can lend.
I have always enjoyed challenging widely held beliefs, probably because so many of them fall apart upon closer examination. Most recently, my contrarian radar started going off in the summer as talk of a Canadian housing bubble increased from a simmer to a boil. One of the most common justifications used in the argument that our house prices are due for aprecipitous fall is that rock bottom interest rates have nowhere to go but up. When rates increase, the argument goes, affordability decreases and prices have to fall or buyers will be priced out of the market. Fair enough. It’s true that when interest rates increase, the cost of borrowing becomes more expensive, and it’s reasonable to assume that our historically low interest rates are more likely to increase than decrease over time. Bubble talkers regularly cite both factors when making their case, and after much repetition, consumers accept the conclusions that are drawn from these assumptions as valid. Far be it for me to let real data get in the way of a good round of group think, but alas, I do enjoy tipping over the apple cart, so here goes.
Over the past thirty years, increases in Canadian mortgage rates have not tended to trigger a decrease in houses prices. In fact, more often than not the reverse is true. Before I get into the numbers, let me start by citing my sources. I took the average five-year residential mortgage lending rate (from Statistics Canada) and compared it to the average selling price of a Canadian home (provided in a report by the Canadian Real Estate Association), on a month-by-month basis from January, 1980, up to June, 2010. I used the five-year fixed-mortgage rate because it is by far the most common term chosen by Canadians, and I went back to 1980 because that was as far back as the CREA stats went. The only tweak I made to the data was to compare interest rate changes to house prices two months hence, because I reasoned that higher rates would immediately impact offers to purchase, which take about two months to become transactions. Here is what I found:
Over this period, totaling 365 months, there were 156 instances where the five-year residential mortgage rate increased over the prior month, and in 97 of these cases, house prices increased two months later. That means that 62% of the time, increasing mortgage rates corresponded with higher pricing. I also wondered what happened to average prices when rates rose precipitously, so I looked at cases where month-over-month rate increases were greater than 5% (this happened in only 22 of the 365 months observed). To my surprise, in 13 of those 22 months there was still an increase in average house prices two months hence. So, even in cases where rates rose dramatically, the odds were still better than 50% that they coincided with rising house prices. While I will concede that this ‘back-of-the-envelope’ analysis is a tad simplistic, I think a trend established using thirty years of data is compelling.
So how do we explain this counter-intuitive result? Well for starters, interest rates and house prices do not exist in a vacuum and both are influenced by the overall strength or weakness of our broader economy. Rising interest rates generally occur in a healthy economic environment where future price inflation is expected, making them a by-product of positive economic momentum. While it certainly is true that higher rates increase borrowing costs, this generally happens in periods with rising incomes, higher levels of employment and increasing consumer confidence. To take our contrarian thinking to its logical conclusion, we should all be rooting for higher interest rates. Seriously. Rock bottom rates are sustained when concern over inflation is replaced by fears of disinflation and outright deflation. Higher rates, on the other hand, are a sign of increasing confidence in our future economic prospects.
One last point. While I think the bubblers have misread the short-term relationship between rising interest rates and house prices, I am not altogether bullish about the immediate direction of house prices. We have seen substantial price appreciation in the last few years, and despite our recent positive economic momentum, we are far from out of the woods. Our average income levels, arguably the most important predictors of the future of house prices, have not kept pace with the rising cost of real estate and the two measures must trend in the same direction over the long-term (with either prices falling or incomes rising to restore their equilibrium at some point). For that reason, I think house prices may well soften over the short-term, but not to a bubble-bursting degree. While the debate rages on, I hope that my analysis of the immediate relationship between rate increases and house prices gives you a different perspective when deciding which camp you’re in.
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A North Vancouver, B.C. developer is offering a rent-to-own program for multimillion-dollar homes as a way to help would-be buyers get in to Canada's most expensive real estate market.
Ray Vesely, CEO of Apex Western Homes, allows those interested to lock into a five-year lease with five per cent down. He explains the deal as similar to a traditional home purchase, but with five years to "close."
A portion of the buyer's rent each month goes toward their future purchase, Vesely said. The buyer has the option to purchase the home between one and five years at the rate locked in on the date the agreement is made. If its value increases, the buyer keeps the market gains.
Rent is higher than a traditional lease, but the money goes to building up a down payment to secure a mortgage in the future. When the renter decides to exercise the "buy" option, they apply for a mortgage and use the equity already built up in the home.
He came up with the idea following his own experience after a divorce, but was also inspired by his staff members' struggles.
"I try to come up with creative ways to help them get a place… I've been thinking about this program for a while," Vesely said Thursday.
The rent-to-own option is meant to help those who want to buy their own place, but are unable to come up with a down payment.
The minimum down payment in Canada is five per cent of the first $500,000, but those buying a home for $1 million or more are required to have 20 per cent. In a market where the benchmark detached home price was $1,617,300 last month, down payments can easily exceed $200,000.
Vesely showed CTV News one of the homes that could be rented to own: a 3,800-sq.-ft. house on MacKay Avenue with four bedrooms, three bathrooms and a legal two-bedroom basement suite. The home was appraised at $2.3 million.
The monthly rent for the MacKay Avenue home is listed at $10,000 online, but those on a rent-to-own contract would be able to live in the basement and rent out the house or vice versa to help with the payments, Vesely said.
Buyers also defer paying GST and property transfer taxes until they exercise the "buy" option.
And the company is marketing the rent-to-own option to foreign buyers as a way to avoid the 15 per cent transfer tax imposed on all foreign nationals or corporations purchasing property in Metro Vancouver.
However, Vesely says the offer is only available to those who are approved for permanent residency status before buying.
B.C.'s finance minister says rent-to-own leases are legal, but that the ministry will be taking a closer look at the tax policy.
"We're very serious about ending tax loopholes and finding those tax loopholes, so I'm very concerned and we'll be investigating," Carole James told CTV.
Vesely said he's already spoken with the ministry and was told what he's offering is permitted.
"Really it's targeting guys like the tech community that are trying to come in. They actually have well-paying jobs, it's just hard to save up for the down payment," he said.
He added that while his program is generating interest, no one has taken him up on his offer so far.
Currently the program is only offered on homes in North Vancouver, but he said he's thinking of expanding into the condo market.
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October 03, 2017
Home buyer demand continues to differ based on housing type
Apartment and townhome activity is outpacing the detached home market across Metro Vancouver*. This activity helped push total residential sales above the historical average in September.
The Real Estate Board of Greater Vancouver (REBGV) reports that residential property sales in the region totalled 2,821 in September 2017, a 25.2 per cent increase from the 2,253 sales recorded in September 2016, and a 7.3 per cent decrease compared to August 2017 when 3,043 homes sold.
Last month’s sales were 13.1 per cent above the 10-year September sales average.
“Our detached homes market is balanced today, while apartment and townhome sales remain in sellers' market territory,” Jill Oudil, REBGV president said. “If you’re looking to enter the market, as either a buyer or seller, it’s important to understand these trends and use this information to set realistic expectations.”
There were 5,375 detached, attached and apartment properties newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in September 2017. This represents a 12 per cent increase compared to the 4,799 homes listed in September 2016 and a 26.6 per cent increase compared to August 2017 when 4,245 homes were listed.
The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 9,466, a 1.2 per cent increase compared to September 2016 (9,354) and a 7.5 per cent increase compared to August 2017 (8,807).
“Detached homes made up 30 per cent of all sales in September and represented 62 per cent of all the homes listed for sale on the MLS®,” said Oudil. “This dynamic has slowed the pace of upward pressure that we’ve seen on detached home prices in our market over the last few years.”
For all property types, the sales-to-active listings ratio for September 2017 is 29.8 per cent. By property type, the ratio is 14.6 per cent for detached homes, 42.3 per cent for townhomes, and 60.4 per cent for apartments.
Generally, analysts say that downward pressure on home prices occurs when the ratio dips below the 12 per cent mark for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months.
The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $1,037,300. This represents a 10.9 per cent increase over September 2016 and a 0.7 per cent increase compared to August 2017.
Sales of detached properties in September 2017 reached 852, a 27.9 per cent increase from the sales recorded in September 2016 (666), a decrease of 33 per cent from September 2015 (1,272), and a decrease of 32.9 per cent from September 2014 (1,270). The benchmark price for detached properties is $1,617,300. This represents a 2.9 per cent increase from September 2016 and a 0.1 per cent increase compared to August 2017.
Sales of apartment properties reached 1,451 in September 2017, a 19.1 per cent increase compared from the sales recorded in September 2016 (1,218), a 5.1 per cent decrease from September 2015 (1,529), and a 22.1 per cent increase from September 2014 (1,188). The benchmark price of an apartment property is $635,800. This represents a 21.7 per cent increase from September 2016 and a 1.4 per cent increase compared to August 2017.
Attached property sales in September 2017 totalled 518, a 40.4 per cent increase compared to the sales recorded in September 2016 (369), a 4.8 per cent decrease from September 2015 (544), and an 11.6 per cent increase from September 2014 (464). The benchmark price of an attached home is $786,600. This represents a 14.5 per cent increase from September 2016 and a 1.1 per cent increase compared to August 2017.
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Onni, a prominent real estate development company, is facing a torrent of online criticism for an ad it says had nothing to do with them.
A Facebook post by Hong Win international group claimed to represent Onni at an exclusive sales event in Hong Kong, where buyers of condos at three Canadian properties “will receive a special discount, which is cheaper than buying in Canada.”
The post has since been deleted.
The properties mentioned in the ad were 1335 Howe Street in downtown Vancouver, the Grande in Port Moody and a tower in Toronto.
In a statement to Global News, Onni executive vice-president Chris Evans said, “the Onni group has no connection to Hong Win International’s marketing efforts, and did not authorize any of their sales promotions mentioned in regards to our Vancouver and Toronto properties currently being sold.
“These statements are 100 per cent false and are not condoned by Onni in any way.
“We have been in contact with Hong Win International and they have ceased all of their marketing efforts and apologized for their error.”
Hong Win International Group has not responded to a request for comment.
The demand for condos and townhomes in Metro Vancouver continues.
In the latest figures from the Real Estate Board of Greater Vancouver, August sales numbers were pushed above average levels due to a sustained demand for condos and townhomes in the region.
Last month, 3,043 residential properties sold, marking a 22.3-per-cent increase compared to 2,489 sales in August of the previous year, and a 2.8-per-cent increase over this July.
When compared to the August sales average from the last decade, 2017’s sales were 19.6 per cent above average.
Real estate board president Jill Oudil said first-time homebuyers led the “surge” this summer in the purchase of condos and townhomes.
“Homes priced between $350,000 and $750,000 have been subject to intense competition and multiple offers across the region,” she said in a statement.
The board had previously observed strong demand for condos and townhomes due to first-time buyers and longtime homeowners competing for the same type of property. However, that demand also comes during a drop in the number of new listings available.
In August, there were 4,245 detached, attached and apartment properties newly listed for sale. That’s a 1.1-per-cent decrease compared to August of last year, and a 19.2-per-cent decrease compared to this July.
While there are fewer new listings being introduced into the market, the number of active listings for sale in August (8,807) remained higher than that of August last year (8,506) but lower than a month ago (9,194).
For those watching for sticker shock, prices for condos and townhomes will likely continue an upward trend, while detached homes have entered a “balanced market.”
“This means there’s less upward pressure on prices and that buyers have more selection to choose from and more time to make their decisions,” said Oudil.
The sales-to-active listings ratio for detached homes is 16.3 per cent during August 2017, with analysts noting that prices begin trending downward when that ratio falls below 12 per cent for a sustained period.
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