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Ottawa to tighten mortgage rules, slow influx of foreign buyers' cash
Alexandra Posadzki, The Canadian Press
Finance Minister Bill Morneau
, THE CANADIAN PRESS/Nathan Denette
TORONTO -- The federal government is taking steps to ease emerging risks in the country's housing market with new measures to slow the injection of foreign cash and to tighten eligibility rules on prospective borrowers.
Finance Minister Bill Morneau's announcement Monday came amid concerns that real estate costs in the sizzling Toronto and Vancouver markets are out of reach for many Canadians. Some fear foreign investment money in these housing markets has helped drive up prices.
Morneau's package of measures, which include strengthening mortgage rules, also reflect growing concern that Canadians have too much debt.
"Pockets of risk have begun to emerge" following several years of exceptionally low interest rates that have changed how lenders and borrowers view debt, Morneau told a news conference in Toronto.
"Overall, I believe the housing market is sound, but as minister of finance I want to make sure that we're proactive in assessing and addressing the factors that could lead to excess risk," he said.
"We will continue to consider how we can ensure that the market stays stable for Canadians and we believe these measures are going to be appropriate to do that."
It remains to be seen whether the changes will have a cooling effect on hot housing markets or how much more difficult it will be for would-be homebuyers to secure mortgages.
Starting Oct. 17, all insured mortgages will have to undergo a stress test to determine whether a borrower could still make mortgage payments if faced with higher interest rates or less income. Previously, such stress tests weren't required for fixed-rate mortgages longer than five years.
The stress test will mean many home buyers, especially those entering the market for the first time, will have to qualify for a loan that is far more expensive than it would have been before the changes. This doesn’t mean they will have to make the higher payment, but it may mean they will be priced out of the market for the home they want.
Right now, the spread between a five-year fixed rate that one can expect from a major lender and the stress-test is quite large. In the examples below, it would mean a 24 per cent increase in the monthly payment. This would drastically increase the lender’s theoretical “Gross Debt Service ratio” and “Total Debt Service ratio” (see explanation below) and could disqualify them from buying a home they thought they could afford.
Mortgage: 5-year fixed at 2.59% (currently posted by BMO and others)
Monthly payment: $1,583.61
Stress test rate: 4.64% (Bank of Canada posted rate)
Stress-tested monthly payment: $1,964.49
Canada's Department of Finance defines the Gross Debt Service (GDS) ratio as the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income. The Total Debt Service (TDS) ratio refers to the carrying costs of the home and all other debt payments relative to the homebuyer’s income.
On Nov. 30, several eligibility rules will tighten on mortgages where borrowers made down payments of at least 20 per cent of the purchase price.
In a move to reduce the flow of foreign cash into markets like Toronto and Vancouver, the government said it will tighten a loophole on an exemption that allows homeowners to avoid paying capital gains tax on the sale of a principal residence.
Going forward, that exemption will only be available to Canadian residents, Morneau said, and families will only be allowed to designate one home as their primary residence.
"Federal government policy alone cannot control house prices; certainly not directly," Morneau said. "But it does have a role in ensuring that housing markets are stable and functioning efficiently."
Phil Soper, president of Royal LePage, said in an interview Monday that he didn't expect Ottawa's measures for insured mortgages to have a significant impact on the overall market.
Instead, he predicted they would serve more as a "tap on the brake" that would lead to a "slight, additional slowing of a market that's already slowing."
"The market will cool on its own accord," Soper said. "The impact of foreign investors isn't large enough to change the force of the overall market."
In recent years, governments at different levels have made several rule changes to address concerns about housing markets in Canada.
Last December, Morneau increased the minimum down payment for homes over $500,000 to 10 per cent from five per cent, a measure aimed specifically at the Toronto and Vancouver markets.
In July, British Columbia imposed a 15-per-cent tax on foreign nationals looking to buy homes in Vancouver.
Vancouver Mayor Gregor Robertson said in a statement Monday that he was encouraged by Ottawa's closure of the capital-gains loophole. He said the loophole allowed for "unregulated, speculative global capital to impact Vancouver's real estate crisis."
"Vancouver's recent home price increases are not sustainable, they put our economy at risk, and shut many local residents out of home ownership," Robertson said.
A report released last week by Swiss bank UBS singled out Vancouver as being at serious risk of a housing bubble.
Morneau said many families looking to buy homes have found themselves priced out of the market, while others have had to pile up high levels of debt.
Chris Ballard, Ontario's housing minister, called the federal measures interesting and said the Ontario government is very concerned about affordable housing in the province.
Ottawa also announced Monday that it will launch a public consultation this fall to explore the possibility of introducing "lender risk sharing" -- a policy that would see the banks shoulder more of the risk for mortgage defaults.