On Monday October 4th, Canada's Federal Finance Minister Bill Morneau blind sided the Real Estate and Mortgage Industry with new legislation that is going to have a fairly sizable impact on the National Real Estate Market.
As of Oct 17th, 2016 all bets are off...
The big announcement will undeniably affect the most vulnerable, especially first time home buyers.
This new legislation no means we're going to have to qualify ALL of mortgage products using artificial (posted) rate @ 4.64% which are almost double the current rate of borrowing. What this means to the average Canadian earning a $60,000 salary, add perhaps a car payment, some student debt, and a small credit card will now have their buying power reduced from being able to qualify for a $300,000 home previously, now they will only able to purchase a property up to $250,000.
Comparably this will also affect families with double incomes as well. If we have a couple making $100,000 per year (combined), let's assume a car payment, a line of credit and a couple of credit cards, now their buying power just dropped from $450,000 to $360,000. Not a small decrease by any means.
Up until now, if you were purchasing a home, you would have to qualify for your purchase using the discounted 5 year fixed rate of the day (Lets assume for this example it's 2.50% - an average rate commonly available in todays market). This lead many to have to opt into 5 year fixed products because anything shorter than a 5 year fixed, you would have to qualify for the posted rate (4.64%). Due to the perceived notion that variable rate products fluctuate drastically, this was the way to provide a "stress test" to the mortgage. As in, if the prime rate increased, it would have to do so many times before this would impact affordability.
The one thing to note here is that this is not limited to those who put down less than 20%, this new change is all encompassing and will have further reaching impacts on the self employed as well (I'll touch base on this in an upcoming post).
This is just the tip of the iceberg, but make no mistake, this move will undoubtedly place significant downward pressure on home prices as buyers who purchase AFTER the cutoff date will have considerably less purchasing power and will push many buyers to the sidelines for the foreseeable future.
Brief state of the union
Over the past 15 years interest rates have fallen to record lows, and yet it seems the following years have proven that they still had farther to go, creating an entirely new reality that we live in today.
If you've taken just a moment to look around lately, the world seems to be in total free fall, with the increasing Civil unrest in many countries such as Syria, Ukraine, Greece, Venezuela, Russia, Saudi Arabia, North Korea, China, Iran, Iraq, Palestine, Israel, Afghanistan, are all facing different conflicts. While they're not at war, unless you've been under a rock, you're witnessing the most controversial and unprecedented Presidential campaign going on in the United States, which has their country more divided than ever. These types of unstable conditions, believe it or not, have made Canada one of the safest places on earth to invest in real assets (bricks and mortar). Our Real Estate assets are quite attractive when comparing them with other parts of the world. (IE: New York, Hong Kong, London, etc) and this is why there has been such demand for properties in Toronto and Vancouver which has lead to the astronomical increases which are undeniably why these new regulations are being imposed on all Canadians.
While we can all admit, we have many problems of our own here at home, ours pale in comparison with the worlds on the global stage and those economic conditions have kept interest rates on a downward trend for almost 2 decades. With the world being in the state that it's currently in, there is no reason for interest rates to rise now, nor in the immediate future as they it would push the country further into recession, which makes these changes seems like they're closing the barn door after the horses are already gone. The dream of home ownership for many just took another painful step backward.
All current Pre-Approved mortgage certificates from every financial institution will become null and require all to re-qualify after Oct 17th, 2016 (However, most lenders will likely start adhering to these new changes before the end of this week if there is no offer in place.)
If you disagree with these changes and would like your voice to be heard, you can contact the Finance Minister below:
Email: Bill.Morneau@parl.gc.ca
Phone: 1-613-369-3710
Tomorrow's post will be on how the other rules can and will impact us after November 30th, 2017.
