The government of Canada over the last week announced a number of changes, incl. reporting requirements for SFH (single family homes) and tighter mortgage lending requirements.
Because the Bank of Canada will very likely not raise interest rates – as it will make the currency artificially high, negatively impact stock market values and curb investment even further – the government had to find other ways to contain price inflation of urban residential real estate, such as
- disallowing insured CMHC mortgages for non-banks (for under 20% down buyers and rental property owners, and
- artificially creating underwriting criteria disconnected from the real interest rates. This has the effect of lower loan amounts, specifically using the banks’ five year “rack rates” of around 4.5% to qualify for mortgage as opposed to the more typical 2.2-2.5% actual rate. This will lower eligible loan amounts by almost 20% for insured borrowers. Ouch !
All this of course is coated in language “to protect the middle class” but it is in fact hurting the middle class, specifically first time buyers, rental property owners and Gen Y folks in their late 20’s and early 30’s.
As such, for SFHs and condos, first time buyers with less than 20% down will see lower loan amounts, and less money supply thus somewhat higher rates. This will keep price escalation somewhat in check and make real estate investments somewhat less lucrative, as prices will rise somewhat slower and you need more cash per house. On re-financings some non-bank lenders will disappear altogether making SFH/condo refinancings more complicated to impossible if too high ratios. SFH/condo real estate investors need to be very mindful of this potentially very dangerous situation where you will possibly be unable to refinance at low rates, or at all. Check your SFH/condo portfolio for debt coverage ratios. Some asset trimming might be in order, although the Big 6 Canadian banks (TD, BMO, RBC, Scotia, HSBC and CIBC) will likely be buying the mortgage books of existing non-banks to buy mortgage market share.
On the flip side, it will create more renters, thus higher rents, and that is good for existing landlords, both SFHs, condos, mobile home parks and multi-family owners. Landlords rejoice and would-be buyers weep.
As a SFH/condo investor you should consider switching asset classes earlier, as you will be tapped out earlier after the 3rd or 5th house. Commercial underwriting has NOT changed. It is based as before on debt coverage of the asset, irrespective of borrower’s personal income, unlike SFH and condos, i.e. multi-family, mobile home parks, industrial warehouses, office buildings, retail or hotels !
Home sales in Canada could fall 8% on new mortgage rules, Finance Department projects
Non-banks crippled by Ottawa’s changes to lending
Gary Lamphier: New mortgage rules likely to hit first-time buyers
Happy Thanksgiving & Successful Investing !
Thomas Beyer, President
Prestigious Properties Group
P.S.: I may comment on the sweeping rule reporting and tax changes aimed at curbing tax evasion and excessive foreign money in another post.