Tighter mortgage rules could jolt Toronto housing market

The federal government's decision to once again tighten rules on mortgage lending is aimed at reining in rising household debt levels, analysts say, but it could also cool down Toronto's stubbornly hot real estate market.

Mortgage rule changes take effect July 9

Condo development has transformed the Toronto skyline. (Andrew Lupton/CBC)

The federal government’s decision to once again tighten rules on mortgage lending is aimed at reining in rising household debt levels, analysts say, but it could also cool down Toronto’s stubbornly hot real estate market.

Under the new rules, due to take effect by July 9, the maximum amortization period for a government-insured mortgage will drop to 25 years from 30 years. Canadians will be able to borrow against their home equity to a maximum of 80 per cent, down from the current 85 per cent.

"If the Toronto condo market wasn't still so hot, they probably wouldn't have come out with these changes at all," said John Andrew, director of the Queen's University Real Estate Roundtable.

"Vancouver is taking care of itself very nicely; condo prices have declined quite significantly. But we're still seeing increases in Toronto’s condo prices month after month, and the oversupply continues to grow," he said.

Finance Minister Jim Flaherty again singled out Toronto’s condo market as one of the government's primary concerns as he announced moves to tighten rules governing the national housing agency, Canada Mortgage and Housing Corporation.

Mortgage payments will be limited to 39 per cent of gross personal income, and an applicant’s total debt-service ratio will be capped at 44 per cent, a move designed to ensure that borrowers can handle property taxes and other costs associated with carrying a mortgage.

Government backing will be scrapped for mortgages on homes priced at more than $1 million, meaning that anyone who buys a home priced in the seven-figure range will have to put up at least 20 per cent of its value as a down payment to avoid the need for insurance.

TD’s chief economist Craig Alexander believes that change will affect those buying and selling houses in the country’s most expensive real estate markets, in cities likes Toronto and Vancouver.

But the new rules could help quell demand for condos, too.

"They have some of the lower price points," Alexander told CBC News. "And when we look at mortgage insurance rules, they tend to be used most extensively by first-time homebuyers. So I do think the changes in mortgage insurance rules will impact first-time buyers, and therefore it will impact condos."

Previous changes

The new rules mark the third time in recent years that the federal government has tightened mortgage lending. In 2008, Ottawa cut the maximum amortization period to 35 years from 40 years and required a minimum down payment of five per cent. In 2011, it slashed the maximum amortization period again, to 30 years.

Shortening the maximum amortization period will force buyers to take on higher minimum payments, but it will also allow them to build up equity in their homes more quickly and reduce the cost of the mortgage overall.

Home buyers looking to avoid the new rules will need to secure pre-approval from a lender for a 30-year amortization and sign an agreement to purchase a home before the July 9 deadline.

The pending changes could spur more activity in some housing markets before they take effect, according to Gregory Klump, the Canadian Real Estate Association’s chief economist.

"There's a good chance that it'll be a busier summer than was originally anticipated, up until July 9, and then after that we'll see what happens," he said.

Questions over household debt

The new mortgage lending rules are the latest in a series of moves by the federal government to slow rising levels of household debt in Canada, which reached a new high of 152 per cent of income in the fourth quarter of 2011.

Meanwhile, the Office of the Superintendent of Financial Institutions, the national bank regulator, also released new guidelines Thursday for mortgage lenders that push them to scrutinize more closely the ability of a borrower to repay debt.

The effects of tightened mortgage lending will likely be significant. Last year, about 40 per cent of all new mortgages were amortized over 30 years, the Canadian Association of Accredited Mortgage Professionals estimates.

Jim Murphy, president and CEO of the association, described the new rules as excessive and said they could be bad for the economy.

"First of all, I think Canadians were getting the message of paying down their debt," he said. "Secondly, we have a lot of signs that the housing market is in fact slowing in Canada."

Flaherty said the rule changes are intended to maintain the "intended purpose" of buying a home, which is to help Canadians save.

Many economists were upbeat about the changes.

"It makes an awful lot of sense to basically tap on the brakes on personal debt growth," Alexander said.

Personal debt was growing at about 10 to 12 per cent annually in Canada before the recession, he said. It’s growing at about six per cent year-over-year today, he estimated, and the new rules could help reduce that further to around four per cent, matching the growth of salaries.