Nov 27, 2017
All Buyers To Be Impacted by New OSFI Mortgage Rules
In an attempt to cool the Toronto and Vancouver housing markets, the provincial and federal governments are pulling no punches in throwing big pots of water on what they believe to be raging fires in both communities. Unfortunately, the impact of these rules is not restricted to these 2 very strong real estate markets and will have a negative impact across Canada.
Here are just some regulatory changes that are going to make it difficult and more expensive for new homes buyers, especially first-time buyers, to buy particularly in these strong markets:
- A year ago, the rules for insured mortgages, which were applicable to loans $1M or less, were changed to require purchasers to meet a stress test of income based not on the proposed mortgage rate but on the proposed mortgage rate plus 2%.This has had a result of reducing the number of insured mortgages over the past year by over 40%;
- On January 1, 2018, new provincial legislation will severely restrict the powers of the Ontario Municipal Board, the ultimate arbitrator of zoning disputes in Ontario.As a result, the lack of an efficient appeal process will make it more difficult for developments to get approved, even if they meet proper planning principles.In turn, this will mean less supply, whether low-rise or high-rise and based on Economics 101, if you restrict supply, prices go up.
The changes will effectively take away the ability of the OMB to substitute its decision for that of the municipality for virtually all new developments, save for projects where the developer is prepared to have 2 rounds at City Hall and 2 rounds at the new OMB. The zoning application process at the municipal level will change to one which is more akin to a judicial hearing. This is a process that municipalities are ill-equipped to handle and will make the zoning process lengthy and costly.
- The latest volley from the federal government came from the Office of the Superintendent of Financial Institutions ("OSFI") which regulates federal banks and insurance companies.They have now imposed the same rule that was imposed last year on insured mortgages, upon institutions regulated by them (banks and trust companies), such that those people that are buying with more than 20% down payment, will have to meet an even higher stress test of not only the current rate plus 2%, but the then current Bank of Canada 5-year mortgage rate plus 2%.That rate is higher genuinely than the shorter term rates or floating rates and is higher even than competitively priced 5 year bank mortgages.As such, adding 2% to that rate would more than double, in most cases, the carrying cost test for any purchaser.
George Carras in the October 28, 2017 Toronto Star ( http://tinyurl.com/yakujju7 ) pointed out that there was no transition measures contained in the OSFI proposal. That would mean pre-construction purchasers who had bought their units expecting to live by the old mortgage rules, would now be subject to the new rules if they closed post-January 1, 2018 and may not qualify as a result. This could put purchasers into default unfairly and expose their deposits or even greater liabilities.
As usual, the government decides to shoot first and think later.
Fortunately, the Canadian Homebuilders Association lobbied OSFI to put in fair transition rules and it now appears that purchasers who have a bona fide purchase agreement before the release of these new guidelines and have paid a reasonable deposit, can, at the discretion of the lender, still abide by the old rules. This would at least protect existing purchasers of new homes and new condominiums, and even purchase agreements for resales that are closing post-January 1, 2018, from potentially being disqualified from mortgages with excessive carrying costs.
However, even with this small concession, there is going to be a significant impact on the marketplace, particularly for the lower end homes and first-time buyers who need to stretch themselves in most cases to qualify for mortgages. By more than doubling the eligibility requirements, unless these purchasers can come up with significant deposits from their parents, or other sources, they will be effectively eliminated from the marketplace or forced to buy product that is far less than what they had expected they could afford based on the current rules.
None of these rules and the "Fair Housing Rules" that Kathleen Wynne imposed last April 2017 regarding foreign buyer tax and caps on rental rates, will have any impact on reducing prices. Restricting demand may slow the price growth, but only creating greater supply at a lower cost will produce more affordable housing.
It is sad to say, but until there is another recession like the one we had in 1990 for 5 years, governments will continue to treat the new home industry as a cash cow and scapegoat for all the ills of society. Lost in the myriad of regulations and taxes, is the fact that homebuilders build homes and communities for people. Governments create regulations that add material costs to these homes. Also lost on government policy makers is the fact that the new home construction industry creates more jobs than virtually any other industry in Canada.
Let us hope that this next provincial election brings us a government that passes laws not only to win votes, but that wants to create jobs and build communities with a choice of different housing where people can live and raise families.
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