Yesterday federal Finance Minister Francis Bill Morneau (a.k.a. FrannyMo) revealed new rules around housing. Most media reported on FrannyMo’s targeting of foreign buyers, but that was nothing new. The conference had little to do with foreign buyers, and a lot to do with cracking down on new homeowners.
Foreign Buyer’s Loophole Closed
The story of the day was the closing of a tax “loophole” foreign buyers were utilizing. The Globe and Mail explained it well, so I won’t waste my time doing that again. Basically, a few foreign buyers are declaring their Canadian investment as their primary home. Places they might never actually see.
This allowed them to reap the benefits of a capital gains rule that allowed a tax-reduced sale of their home. The thing is, people aren’t suppose to be falsely declaring their primary residence in the first place. The government basically just did a loud saber-rattle to say they’re not going to take it anymore. Good for them.
New Homeowners Targeted
The interesting thing that was announced is “stress testing” of borrowers starting October 17. It’s not so much a stress test, as a raising the bar for traditional borrowers. People applying for insured mortgages will have to qualify at the Bank of Canada (BoC) “conventional mortgage” rate, instead of the local bank rate. A quick peek and we could find at least 20 banks offering rates at half the rate of the BoC conventional rate.
This means that a non-Big 5 bank can’t offer you more money than a Big 5 – even if the rate is substantially lower. For example, let’s say your household earns the Canadian median income, $78,870. Using a rate of 2.10% (there’s at least 20 places offering this), you could qualify for a mortgage of $375k-498k. Just enough to buy the benchmark average home in Canada.
To contrast, the BoC rate is 4.64% right now. That’s the rate homebuyers will likely be stress tested against if the rules applied today. Using a rough calculation, the largest mortgage at this rate would be $273k-363k. That’s a 27% drop in the qualifying amount, even if you could get rates at half the price. More importantly, it means the median income of Canada won’t buy you the average home. In fact, in Toronto and Vancouver, you likely couldn’t buy anything but a parking spot for that price.
In cities like Toronto, first-time buyers are now 36 years old. Increasing requirements will likely push that age further back, crushing many dreams of homeownership. Although they didn’t change the mindset of buyers, they just made it harder to borrow at traditional banks. This could have an unintended consequence, increased demand for subprime mortgages.
Subprime To The Rescue
The financial stability of Canadian homes have been decaying over the past 20 years. Household debt is soaring, incomes stagnating, and the job market for Millennials just sucks. This hasn’t resulted in people opting out of homeownership however. People are just becoming more and more comfortable with subprime borrowing. We even gave it a cute name that doesn’t sound as bad – “alternative lending”. Like you’re rebelling against your traditional bank. Rock on.
Previously thought to be a small number of mortgages, subprime and private lending is now a massive industry. The industry has almost doubled in the past 5 years, having gone from 6.7% of mortgages in 2007 to 13% in 2015. That explosive growth is due to increase as more and more Canadians fail to meet traditional borrowing standards.
Related fun fact, former finance minister Joe Oliver has a new gig at an alternative lender.
Newly tightened mortgage lending requirements will likely result in more people turning subprime. The underlying issue that houses are still the best job most Canadians can get still exists. You can try to regulate that out, but it’s unlikely to solve the problem. Until people are presented with better investment opportunities, they’ll continue stashing money in homes. Even if they have to take predatory private lending rates.
The new rules revealed by FrannyMo are likely to have little impact on affordability. In fact, they may actually make Canadian debt issues worse. Although it would’ve been a crappy press conference if they just said that, right?
Note: I would’ve linked to details about the announcement, but they only provided a photo gallery of the conference. You can find the photo gallery here, but unless he’s your type it’s pretty useless.
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How is the CRA going to collect tax on foreign residential property owners when they sell a house which the haven’t occupied as a principal residence for the required period, they don’t file taxes in Canada and the tax is not withheld from the proceeds of sale and submitted to the CRA.
I thought the amount of mortgage over $1 Million is not covered by the CMHC which, in Toronto and especially in Vancouver is most single family detached houses. Affordable homes for first time buyers in those cities is virtually non-existant which is forcing them to buy small, and getting smaller, condos which are inadequate to raise a family in. The new mortgage approval rules will guarantee there are no first time home owners in Toronto and Vancouver who could buy anything but a condo and will probably not be able to buy a house because they won’t be able to save enough due to the ever increasing condo fees and lower rate of appreciation of condo values compared to homes.
The lack of affordable homes in Toronto and Vancouver and the higher financial requirements for mortgage approval will cause a financial class based imbalance in the resident makeup of Toronto and Vancouver which will be cities mainly occupied by the well-off and wealthy. A significant shortgage of service industry workers will develop as that income class abandons living and working in Toronto and Vancouver.
Conferring a deductible on default CMHC insured mortgages to the mortgage lender is good policy because it will, hopefully, make the lender accountable for the first portion of the cost of a mortgage default and make them careful about the mortgage paying ability of the potential mortgagee but the lenders will figure out a way to circumvent that, especially the “big” banks who think they are too big to fail, daring the federal government to allow their failure if there’s a housing market crash, because allowing bank failure would cause serious damage to Canada’s economy and the government in power which allows bank failure would lose the next election and probably be relegated to unofficial party status forever which no political party in power wants.
Mortgage interest deductability from income lowering federal income tax for mortgagees who have employment earnings (wages) below a specific amount would be very helpful to the low paid working poor especially those who work in part-time jobs, service sector jobs such as restaurants, office cleaners, labourers, etc. The deductible portion of the mortgage interest would essentially become an interest free loan to be repaid by being withheld from the future proceeds of sale of the subject property and submitted to the CRA upon the transfer of ownership. If not fully repaid the balance owing would be transferred to the next mortgaged property. If another home is not purchased, the balance becomes repayable at a rate related to income until completely repaid. If the person dies before full repayment, the balance is deducted from their estate, if there isn’t enough to retire the loan the outstanding debt is written off. This would also help young home purchasers, when their income is lowest during their life, who need a home to raise a family.
I just don’t see it………I see prices coming down. I think they may come down considerably actually as people just will not be able to afford current prices and have hit a wall in terms of the debt loads they can carry.
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Another Liberal clown. He’s working for Bay Street, not the people that elected this government. I really thought Trudeau was going to be different. I’ll know next time!
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