Oct
03

Monday October Third, Two Thousand And Sixteen.

Today may end up being one of those defining moments in our housing market, that’s why I called this post Monday October Third Two Thousand And Sixteen. It’s a very important date to consider when we look back in a few years’ time in assessing if this move was the right move in trying to normalize activity in our feverish Toronto housing market. Why in a few years? Frankly, I don’t think we’ll see a change overnight but I do think it’ll take some time to figure out what kind of impact this move had.

And what a move it is.

First let’s start with the basics. If you have less-than-20% down payment you’re going to have to qualify for a mortgage at a much higher criteria, called “the stress test”. Prior to today, anyone in the market could (easily) qualify at the discounted rates if they were okay with a 5-year fixed. The thinking was, hey, 5 years is a long-enough time to hold a loan, let’s let those terms qualify at 2.39, and anyone else (variable, for example) qualify at a higher rate, since variable rates may move with time (up or down).

Now, everyone is at the same qualifying rule: 4.64% (today). That’s not the rate you get, that’s the rate I use to qualify you. On average that’s about 20-25% less in borrowing ability than before. Wow, big change, right?

Now let’s discuss how we may have gotten here. You see, in Canada there are two places to get your mortgage from: A bank, or a lender. A bank is backed by deposits and branches. A lender is backed by CMHC and mortgage insurance, and securitizes all of their loans through the mortgage insurance market. A lot of people have opined that this move was brought on to cripple the competition in the form of the monolines, since many of their loans will not be under this new regime. It may be true, I can’t say for sure, but it’s a very plausible theory. Why? Well, banks charge an enormous penalty when breaking their fixed-rate mortgages and I hope many Canadians caught on and decided to go with a lender instead, so the banks decided to press Ottawa in making this big change in qualifying IF you get a loan with mortgage insurance.

How else did we get here? Whether you voted Liberal, Conservative or NDP it doesn’t matter. Let’s not blame this on Justin, as many are already knee-jerking on social media. This isn’t Justin Trudeau’s fault at all; any government we had would’ve made some changes (NDP would’ve been worse, Conservatives maybe better) - but changes had to happen - our market IN TORONTO is just too expensive.

And finally, a lot of focus has been on qualifying and rates but we’re finally addressing the issue of supply. Our Government isn’t doing a good-enough job in allowing more supply to come to market and that’s going to have to be the next shoe to drop in the form of easier building rules, allowing areas to develop and possibly more incentives to get housing built.

Let me be clear. I’ve seen a lot of change in our market. I remember when 25-year amortization was the norm, and an average house cost $450,000, and then we had 40-year amortizations with ZERO down payment available. Fast forward now and an average detached house is almost $1M if not over and we are effectively rolling back the clock to the days of 2003. What impact will this have? Well, what impact did the last eight mortgage-rule changes have on our market? Zero.

Who this will impact the most is the 5% down buyer who has great income but just has not been able to save enough for a down payment to get to 20%, to potentially avoid these rules. What I think we’ll see is a lot of Bank of Mom & Dad financing by way of either adding their names to title OR gifting the amount to get to 20% down. If that’s not possible then we’ll see an adjustment in reality and expectations by buyers in the 5% market to either buy something outside of the area(s) they were looking or outside of the property type they wanted.

Who this will also impact the most is the buyer who is only shopping for the best rate. Right now it’s easy to get “the best” rate by giving up a lot of term and flexibility. Moving forward it is still yet to be determined how this market will be impacting the lenders that offer best rates, so we’ll have to wait and see if the dialogue is going to change from “Get me the best rate” to “Hey, get me approved!”.

You have until October 17th to get your purchase agreement in writing and mortgage application in to get qualified under the old rules - and even that may change -so if you’re on the fringe and need help, contact me today. This is the time to work with someone who has excellent lender, appraiser and legal partners and who can get your deal done right.

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