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Canada’s New Mortgage Rules Could Actually Make Housing More Expensive

Best-case scenario, housing is a little more affordable. Worst-case, you're paying more.
February 19, 2020, 5:32pm
Canada's new home buying rules could actually make housing more expensive
Photo by Jonathan Hayward via the Canadian Press

If you’re thinking of buying a home this year (lol), the federal government is changing mortgage qualification rules on April 6 so that ownership is a teeny-tiny bit more accessible. But economists say that unless you’re making a ton of money (lol), these changes don’t actually help much and in some instances the policy could backfire, and increase home prices.

The new rules apply to insured mortgages, with a down payment of less than 20 percent, which is the majority of first-time homebuyers. According to rate comparison site Ratehub.ca, for someone looking to buy an average-priced home of a little more than $500,000, the new system means you can borrow 3 percent more than you could before. So, it’s not a game-changer. Specifically, a couple with an annual income of $100,000 and a 10 percent down payment on a 5-year fixed mortgage rate of 2.89 percent amortized over 25 years would qualify for a loan for $526,632. Under the old rules, they would have been able to afford $511,424—that’s a difference of $15,208.

James Laird, the co-founder of Ratehub.ca says this is the first time in a decade that federal government rules have tried to make mortgages more affordable, not less. “It’s not drastic but it’s a step in the right direction,” he said.

The government initially tightened mortgage qualification rules in January 2018 in the hopes of cooling the housing market. Based on Ratehub’s calculations, that reduced affordability by about 20 percent compared with 2017. So when the new rules kick in this April, buying a home for most people is still 17 percent less accessible than when the first stress test rules were implemented at the start of 2018.

This particular policy change could even have the opposite effect, by making it more expensive to get into the housing market.

“Anytime we make a change that makes housing more accessible or more affordable, the unintended consequence is that it should have a fairly direct correlation with pushing up home prices by a very similar amount. The estimate is that this could drive up home prices by 1 to 3 percent,” said Laird in an interview.

This increased interest in buying a home by people who might otherwise sit it out could push prices higher. And according to David Macdonald, a senior economist at the think tank Canadian Centre for Policy Alternatives (CCPA), this means cash-strapped young people could be taking on more mortgage debt, but that doesn’t make a significant dent in making housing truly more affordable.

According to the Canadian Real Estate Association (CREA) home prices across the country climbed 11 percent in January. But if you look at how much faster prices are rising compared to incomes, it’s not shocking that millennials take an average of 13 years to save for a 20 percent down payment across Canada, instead of the 5 years it took their parents in 1976. Make that a couple of decades in Toronto and nearly 30 years in Vancouver. That may be why almost half (46 per cent) of Canadian millennials think that becoming homeowners in the near future is “a pipe dream” according to a poll by global accountant KPMG.

“Ultimately, extremely low mortgage rates have driven house prices through the stratosphere in major markets. This has left many families, particularly younger ones, with a massive hurtle to get into the housing market. Increasing their debt load, like through changes in the stress test, is a quick fix, which may well come back to bite new homeowners,” he said in an interview.

Even with these new tweaks to mortgage qualification rules, the cost of living, regardless of whether you rent, or own, in most major cities has risen much faster than young workers’ incomes. A recent report shows that 40 percent of Canadians spend more than one-third of what they make on housing and another one-third rely on their parents to help make rent. Research out this month by Rentals.ca, a real estate site, suggests that rental rates have risen dramatically in the last year and a half, hitting low-income renters the hardest. That, in turn, keeps young Canadians further away from home ownership for longer.

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