Ottawa eyes tougher new mortgage rules, larger down payments, to curb Canada's red hot housing market
Exclusive: Federal government actively consulting on whether it is time to throw some cold water on Canada's overheated housing market, considering lowering amortization lengths and increasing minimum down payments
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The federal government may be ready to take direct aim at Canada’s red-hot housing market, and is actively consulting on a move to increase the minimum down payment required to buy a house, the Financial Post has learned.
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Royal LePage says it’s worried another rate cut might add fuel to some of the country’s already red-hot housing markets — a position that may seem at odds with the typical stance from realtors.
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Sources say that Ottawa has been studying proposals to increase the minimum down payment from five per cent and said the government is looking at adding restrictions for high-priced housing, which would hit hardest in Canada’s two most expensive cities — Toronto and Vancouver.
“They are definitely looking into this but it doesn’t mean that they will do it,” said one source close to the department, who asked not to be identified. Another source confirmed Ottawa is continuing to look at possibilities for increasing the down payment.
A source with the Department of Finance denied the government is considering any changes to the minimum down payment.
But any inclination to intervene in an already frothy urban housing market can only have intensified after the Bank of Canada announced Wednesday it would lower its benchmark overnight lending rate to 0.5 per cent, leading three major banks to cut consumer rates. Observers have warned that this will only further fuel rising home prices and sales.
Lowering the overnight lending rate is likely to lead in reductions to the prime lending rate used by consumers with floating-rate debt. TD Bank was the first out of the gate Wednesday to lower its prime lending rate, cutting it by 10 basis points to 2.75 per cent. Royal Bank went even lower on Wednesday night, cutting its prime rate to 2.7 per cent. Some financial institutions had already been offering variable-rate loans tied to prime for under two per cent.
Phil Soper, chief executive of Royal LePage Real Estate Services Inc., said the rate cut will probably be good news for the real estate industry and increase house prices in the short-term. “People don’t buy homes based on sticker price, they buy homes based on carrying costs. When carrying costs are lower, they acquire more home,” he said. But, in the long term, he is still worried about an overheated market and the potential for a correction.
Still, the industry has insisted there is no upside to increasing minimum down payments. It has long maintained that would have a disastrous effect on some people who struggle to get together enough money to buy into Canada’s hottest markets.
“The challenge with further restrictions is they impact the first-time home buyer which really isn’t the issue here. They’re not the ones buying detached homes worth more than $1 million,” Soper said.
One scenario being looked at by the government contemplates an increase in the down payment only beyond a certain high-price threshold — a move clearly aimed at Toronto and Vancouver where prices have skewed the national average.
Without explicitly saying so, Ottawa has previously targeted the country’s more expensive markets by tightening up lending rules across the country, and Canada Mortgage and Housing Corp., the Crown corporation that controls a majority of the mortgage default insurance loans, will not back loans for homes worth more than $1 million.
The government has also tightened rules on mortgage amortization lengths. Once as long as 40 years, amortization lengths were lowered in three stages from 35, to 30 to the current 25.
As part of its study, the Finance Department is also considering a maximum 20-year amortization on a mortgage. Longer amortization lengths allow consumers to get a lower monthly payment and therefore qualify for more debt.
Consumers were once able to borrow with zero money down, but current federal rules require a minimum down payment of five per cent in order to get CMHC’s mortgage default insurance, backed by the government. The cost of that insurance can be tacked onto the mortgage itself, which effectively leaves a consumer with a debt position equal to almost 98 per cent of the value of their homes.
The Canadian Real Estate Association said Wednesday the average price of a home sold in June across the country rose 9.6 per cent from a year ago to $453,560. But stripping out the Vancouver and Toronto statistics, the year over year price gains were just 3.1 per cent nationally.
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