Canada's Condominium Magazine
Data released in November by the Toronto Real Estate Board showed a decline in housing prices. However, the price drop only slightly improved an overly inflated housing market. In an economy where condominiums go for $400,000 or more, buyers have been forced to take out large loans, sometimes taking on loans from multiple sources. This resulted in debt that exceeded the average household income, meaning homeowners were stuck with debt they would not be able to pay off for a long time.
A statement released by the Office of the Superintendent of Financial Institutions in October announced enhanced guidelines for low-ratio mortgages. According to the statement, the guidelines “reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits.” The guidelines include the following:
- A new minimum qualifying rate, or “stress test,” for uninsured mortgages
- A requirement for lenders to enhance their loan-to-value measurement and limits so they will be dynamic and responsive to risk
- Restrictions on certain lending arrangements that are designed, or appear designed, to circumvent LTV limits
The Royal Lepage Market Survey Forecast stated that the stress test would limit national home price appreciation to 4.9 per cent for this year. According to the report, “One of the most significant regulatory interventions in the housing industry in years is the incoming Office of the Superintendent of Financial Institutions (OSFI) mortgage financing stress test, which will take effect on January 1, 2018. The stress test targets existing and prospective homeowners applying for a mortgage, requiring them to meet stricter criteria when seeking new financing.”
According to Royal Lepage President and CEO Phil Soper, “It is prudent that policy makers introduce measures that help protect the housing market from runaway price inflation. However, natural supply and demand forces will always triumph over regulatory tinkering. Attempting to use public policy to steer property prices in huge, rapidly growing cities like Toronto and Vancouver is like a tugboat trying to turn an ocean liner. Consistent, measured policy can have a positive impact. Just don’t try to turn the market on a dime, or you risk sinking the ship.”
The existing cooldown, which resulted in an increase in supply over the last several months, continues into the new year. Re/Max’s recent report foresees a more stable market for the Greater Toronto Area in 2018, as the guidelines “are anticipated to reduce buyer purchasing power and may result in more buyers purchasing condos, which are a relatively affordable option in the GTA.”
The Re/Max 2018 average residential price expectation for the Greater Toronto Area.
However, the guidelines have some worried that prices may pick up once again, despite efforts to the contrary. As buyers are unable to qualify for financing, consumer confidence may take a hit. Sellers, uncertain of their ability to sell their homes or obtain the required financing for their next purchase, will hesitate to list their homes, preferring to “wait and see” how things go. According to the report by Royal Lepage, “some potential move-up buyers will likely delay listing their homes as they will not be able to access sufficient financing for their desired next purchase. With further diminished affordability, it is likely that demand for entry-level properties will surge.”
In December, Toronto active listings were up 172 per cent from a year earlier. While a major spike in supply coupled with fewer buyers would result in a rapid decline in prices, the likely contributing factor to the increase in active listings is the desire to sell before the guidelines go into effect. The supply will dwindle as buyers are unable to purchase them. Additionally, the decline in prices thus far has mainly affected housing, while condo prices have faced significant growth. If the housing market does heat up again, any remaining buyers will likely flock toward marginally more affordable condominiums, which will result in an even more rapid rise in condo prices.