Flaherty’s Mortgage Rules Poised to Take Heat off Toronto
Brendan Donnelly is relieved Canadian Finance Minister Jim Flaherty is taking additional steps to cool Toronto’s housing market.
The insurance broker, 25, was married in October and wants to buy a home when his lease expires on his Toronto condo in seven months.
“I’m hoping it will make it more likely I will buy a home,” said Donnelly, who is looking for a two-bedroom home for under C$500,000 ($486,000) so he can start a family in the next two years. “There will be less people looking to buy homes in the near future.”
Donnelly may get his wish. Flaherty’s decision to tighten mortgage rules could take the heat out of a Toronto real estate market where average prices have surged by a third to C$516,787 from five years ago and there are more skyscrapers under construction than any city in North America.
“I think it will cool off the mortgage real estate market coast to coast,” said Sadiq Adatia, chief investment officer at the Sun Life Global Investments unit of Sun Life Financial Inc. (SLF) Adatia thinks housing prices will drop 15 percent.
In reducing maximum amortization periods to 25 years from 30 and reducing the most homeowners can borrow against the value of their homes to 80 percent from 85 percent, Flaherty singled out Toronto -- where the number of completed condo units next year will be double the five-year average -- for its “continuous building, without restriction.”
“This concerns me because it’s distorting the market, quite frankly,” Flaherty told reporters yesterday in Ottawa. “And for that reason we’re taking the steps that we have today.”
“What Flaherty must be looking at is just the level of supply coming online,” Ben Myers, executive vice-president of Toronto-based research firm Urbanation. About 18,000 to 20,000 new units are expected to be completed this year, followed by 25,000 to 28,000 units in 2013. Supply has averaged 12,000 to 13,000 new completions over the last five years, he said.
Stricter rules may scare off first-time homebuyers that have been driving growth in markets such as Toronto, Myers said.
“We’ve already started to see a bit of a cooling” in Toronto’s condo market, Myers said in a telephone interview. “This just adds to that.”
Along with new guidelines set by Canada’s banking regulator, the changes “may precipitate the housing market downturn the government so desperately wants to avoid,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals.
Increased levels of construction in some Canadian cities concerned bank executives including Gerald McCaughey, CEO of Canadian Imperial Bank of Commerce, who said in April that a high level of homebuilding could create a glut, leading to a market correction.
CIBC and other banks tightened lending standards for condo builders after warnings from Canada’s Office of the Superintendent of Financial Institutions, developers said in March.
Under the new rules, the monthly payment on a C$350,000 mortgage with an interest rate of 3.29 percent would rise to C$1,713.01 under a 25-year amortization period from C$1,530.92 over 30 years, Bloomberg calculations show.
Canada also will cap payments on housing-related expenses at 39 percent of income and limit government mortgage insurance to homes valued at less than C$1 million.
Jamie McQuay, who recently ended a two-year search to move his family from their Toronto condominium to a house in the city’s trendy Trinity-Bellwoods community, is not sure the changes will have much effect.
“The areas we’re looking at I don’t think it’s going to work because it’s a shortage of houses,” said McQuay, 36, who runs a software company. “There’s just not that many houses for sale.”
Maria Jenkins, a broker for RE/MAX Hallmark Realty Ltd. on the Danforth in the city’s east end, said she didn’t believe there was a housing bubble and wasn’t worried about the new rules after 28 years in the business.
“There is not much inventory to satisfy the demand and we are already dealing with major lenders who have tightened their rules and appraisers being more conservative,” Jenkins said. “The most affected will be investors in rental properties, speculators.”
Jim Ritchie, senior vice president of sales and marketing at Toronto-based real estate developer Tridel, said most homebuyers in Toronto won’t be affected because the tightening won’t apply to them.
“This is going to affect affordability a bit,” said Ritchie. “But I don’t think it’s draconian and that it’s going to cause massive problems here.”
Before today’s announcement, Flaherty had tightened mortgage insurance rules three times since 2008. Following each move, national average resale housing prices declined, only to regain the lost ground and continue climbing, according to data from the Canadian Real Estate Association. Canadian home prices increased 19 percent from the start of 2007 through April.
The government doesn’t plan to raise the mortgage insurance limit of CMHC, which had C$570 billion of insurance in force at the end of March, Flaherty said. He said the government plans instead to raise the limit for private mortgage insurers such as Genworth MI Canada Inc. (MIC) to C$300 billion from $250 billion.
Alternative lenders may step into the breach as business shifts away from banks, said Stephen Boland, an analyst at GMP Securities in Toronto.
“The government doesn’t necessarily need to be, at the end of the day, in the mortgage insurance business,” Flaherty said.
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