First-time homebuyers take hit with new mortgage rules
New policy should have been phased in slowly, not as 'one-time shock,' say real estate watchers
Dil Kaur's dream of a two-bedroom condo was already a downgrade from her original idea of buying a detached house somewhere within the Metro Vancouver area.
Kaur, 33, began searching two years ago and soon realized that buying a house wasn't possible. Prices were too high.
Kaur lowered her expectations, hoping to find a two-bedroom condominium with enough space to one day accommodate a family.
But after Ottawa announced tighter mortgage rules earlier this week, the dream of owning even a modest condominium might be out of her reach.
Now, she's lowered her expectations once again, and is looking for a one-bedroom condo.
Puts squeeze on first-time buyers
"It's a reality," Kaur said. "You can either wallow in your sorrows or accept it."
Real estate watchers predict Ottawa's tighter mortgage rules will make it tougher for many first-time buyers like Kaur to purchase a home.
"This change of policy is — de facto — cutting 20 per cent out of their purchasing power and will squeeze first-time buyers out of the market," said Cameron Muir, chief economist with the B.C. Real Estate Association.
Under the new regulations, announced by Federal Finance Minister Bill Morneau, first-time buyers with mortgages insured by Canada Mortgage and Housing Corporation will now undergo a more severe "stress test."
Beginning Oct. 17, banks will test the ability of a buyer to repay a loan against a higher five-year rate — the posted rate at the big banks.
The actual rates available at those banks are significantly lower.
That tighter requirement was already in place for "high-ratio" mortgages, where people have a small down payment, but from now on, all insured mortgages will be tested against that higher bar.
Morneau said the new measures are aimed at reducing high household debt, and making sure middle-class families buy homes they can afford if interest rates go up or incomes go down.
Cuts purchasing power
But Muir, with the B.C. Real Estate Association, said many first-time buyers won't meet the new requirements.
He gives the example of a couple with a household income of $80,000 and an insured mortgage. Previously, that couple would have been able to buy a $500,000 home.
Now, they will only be able to spend $400,000.
Kaur said she's sure the changes will affect her. She was looking for condos in the $600,000 to $700.000 range. But with a relatively low down payment, she might not qualify for a mortgage in that price range.
"It just seems like every single change the federal and provincial government is trying isn't helping [affordability]," Kaur said.
She has an administrative job in commercial banking and she's been saving for years to buy a home. She also has help from her parents.
Muir said the new regulations will further erode the ability of young people to afford homes in the expensive Vancouver market.
Baby boomers and Gen X'ers had an advantage, he said.
"A sweet spot has been in effect for many decades and has benefited many buyers, allowing them to buy a house now rather than when their children are grown up."
A shock to first-time buyers
Muir said the new federal policy may be beneficial in the long run, but it should have been phased in slowly.
"Introducing these measures as a single measure, a one-time shock to the economy, doesn't seem to help affordability."
In the short term, he predicted that potential new buyers will pull back, prices will soften and construction will slow.
And the rental market will get even tighter as former potential buyers stay where they are.
He said by the time the millennial generation has saved bigger down payments, the supply will be tight, and prices will once again rise..