What mortgage rule changes could do to real estate prices

Mortgage rules are about to change, especially with concern over several ‘heated’ markets that might present a higher risk to mortgage insurers.

Last week, Canada’s banking regulator said they want mortgage default insurers to put up more capital for mortgages that might present a higher level of risk.  This could affect mortgage interest rates and premiums on mortgage default insurance.

Buyers who put less than 20% downpayment on the purchase of a home pay CMHC or Genworth mortgage default insurance.  Currently, the premiums for default insurance are the same in all markets across Canada.  With particular concern over the overheated Toronto and Vancouver markets, increased capital requirements for mortgages in those regions means premiums might go up if you’re buying a home in Toronto or Vancouver.  And interest rates might follow.

Could these changes possibly cool the market?  Perhaps.  Vancouver has already seen a decline in sales coinciding with the introduction of a 15% foreign buyer’s tax.  Toronto’s real estate market continues to soar with double digit growth.  If these mortgage rule changes come to fruition, time will tell what will happen to Toronto’s real estate market.

Why mortgage rule changes could affect real estate prices

If capital requirements are expected to increase for overheated markets, either the mortgage insurer or the buyer will bear the cost of the premiums.  More than likely, insurers will increase premiums which in turn affect the affordability of the buyer’s seeking homes.  When affordability is affected, buyers can’t buy ‘as much home’ as they could with present conditions, which means prices could see a bit of cooling as buyers adjust to increased premiums.

If these rule changes affect mortgage interest rates, affordability would also be affected, and the same result would be seen in the affected markets.  High interest rates means higher monthly payments and reduced affordability.  Buyers who remain unaffected may still continue on with their plans, but the majority of buyers who have less than 20% downpayment and are on a tight budget may not be able to afford the same monthly payment if interest rates go up.

How soon could we see the affect of these changes?

The draft proposal seems changes that may come into effect as early as January 1st, 2017.  While the winter market isn’t as busy as spring and fall markets in Toronto, the possibility of cooling prices affected by these rule changes might be seen around the time these rules become officially implemented.

The recent double digit price jumps in Toronto real estate prices seem to have spurred policy changes.  While fundamentals remain the same (limited supply amidst ever increasing demand), the affect of a policy change affecting premiums and mortgage interest rates is a way to curb rapid price increases.  Time will tell what will happen in the Toronto market as a result of these mortgage rule changes.