November 17th marks the one-month anniversary since some of the new mortgage rules came into effect. These rules were introduced mainly as a way to slow down the red-hot real estate markets in Toronto and Vancouver. Both cities have seen double digit price appreciation year over year in recent months.
Vancouver has seen its fair share of new rules to slow down the real estate market. First, a 15 per cent foreign buyer’s tax was introduced in B.C.. Now, councillors within the city itself have approved a one per cent tax on homes left empty for six months or more, provided they are not the owner’s principal home. Sales have slowed somewhat in recent months, but prices have yet to come down. That’s a different story from Toronto, which in October saw home prices jump a whopping 21 per cent year over year.
Although the new mortgage rules were designed to orchestrate a “soft landing,” they’ve been criticized for hitting first-time homebuyers where it hurts: their purchasing power. Homebuyers qualify for about 20 per cent less of a home under the changes. This makes it especially tough for those looking to buy in pricey real estate markets.
Two of the Big Banks Raise Their Prime Rate
RBC has become the second bank to hike mortgage rates in response to the new rules, which simply make it more expensive to borrow money. The new rates, to be introduced on Thursday, include 30 basis point increase on its five-year fixed-rate mortgage to 2.94 per cent and for its four-year fixed rate mortgage to 2.79 per cent, and 25 basis point hike for its three-year fixed rate mortgage to 2.69 per cent for amortization periods of 25 years or less. This marks the bank’s second rate hike this year.
Earlier this month, TD Canada Trust raised its prime rate from 2.70 per cent to 2.85 per cent for variable rate mortgages. It has not altered its fixed rates at this time.
A Jump in Sales, Mortgage Applications
Not surprisingly, there was a rush of sales before the new mortgage rules came into effect. Buyers flocked to banks and other financial institutions to qualify under the old, more generous rules.
“As soon as the public received word of the mortgage changes, there was quite a lot of activity,” says Laura Cooper of Royal LePage Estate Realty Brokerage. “There were a huge amount of properties that were purchased during that time.”
There was also a jump in mortgage applications – “an increase of approximately five to 10 percent in applications leading up to the mortgage changes,” says Sean Schumacher, a mortgage agent at Safebridge Financial Group.
Bidding Wars Tapering Off
Homes may still be selling for top dollar, but bidding wars have slowed down after the new rules came in.
“Since the new rules came into effect, I have seen the market start to cool off,” says Cooper. “Instead of listings receiving eight to 10 offers, you’re now seeing two or three. It seems like the market is taking a breath.”
It’s a similar story on the mortgage side with a slight slowdown.
“I’ve seen a slight dip in (mortgage) applications since the new high ratio rules came out,” says Schumacher. “Obviously some buyers may assume, or now know that they no longer qualify for their desired price range and a small number of buyers may be holding off to see how this effects the overall real estate market before jumping in.”
What the New Rules Mean for Millennials, First-Time Buyers
If you’re a Millennial looking to buy, you may still be able to get into the real estate market but not have the ability to afford your dream home right away.
“Millennials’ buying power has decreased by about 20 per cent,” Cooper says. “I feel as Millennials will be living at home even longer now, renting longer, looking to the bank of Mom and Dad or having a parent or two to co-sign for them as they don’t qualify on their own anymore.”
Going forward, property virgins looking at getting into the market can shift their attention away from detached homes and look towards condos and townhouses, which still remain affordable.
“If new buyers aren’t able to borrow (money from their parents), I’m seeing them purchase condos in Toronto to build some equity to later use for a house one day,” Cooper adds. “If that still isn’t affordable or they would still prefer a home in the city, then condos and townhouses with lower maintenance fees seem to be the way to go.”
There’s also a concern that the new, stricter mortgage rules may move more first-time homebuyers to riskier shadow banking.
“I believe there will be an increase in the ‘B’ and private lending space if the real estate market continues to do well. If the deal makes sense, there are other forms of financing, which consumers will naturally seek out if the traditional bank, or ‘A’ lenders won’t work for them,” says Schumacher.
Have the new rules impacted your purchasing power? Let us know in the comments below!