OTTAWA — Canadians looking to buy homes valued over $500,000 will soon be required to come up with larger down payments in a move the federal finance minister says is designed to ensure stability in Canada's biggest real estate markets.
Market watchers and home sellers predict the move — in concert with other regulatory changes — will have little impact on house sales and prices that continue to rise despite a fragile overall economy.
"Rather than a blunt instrument to cool the market, this is a targeted measure designed to deter a very small segment of buyers from stretching into the market with a very low equity position," said Robert Kavcic, senior economist at BMO Capital Markets.
Under changes announced Friday by Finance Minister Bill Morneau, homebuyers will have to put a 10 per cent down payment on the portion of the price of a home over $500,000.
Anything under $500,000 will still only require a five-per-cent down payment. The changes are to take effect Feb. 15, 2016.
"This will impact one per cent or less of the market," Morneau told a news conference.
For buyers in Toronto, where the cost of an average home has reached $625,000, the change will mean they'll have to come up with an extra $12,000 in order to qualify for mortgage insurance through the Canada Mortgage and Housing Corporation.
The new measure is aimed at expensive homes while still encouraging first-time homebuyers to get into the market, said the minister.
"We recognize that, specifically in the Toronto and Vancouver market, we've seen house prices that have been elevated," Morneau said.
"And we want to make sure that we create an environment that protects the people that are buying homes so they have sufficient equity in their home."
The stiffer down payment requirement is one of three new measures targeting the stability of the housing market.
Financial institutions will face new capital requirements to keep pace with the growing risk of the real estate markets they bankroll.
And Canada Mortgage and Housing Corp. will change the fees it charges issuers of mortgage-backed securities.
While the intent of the government may be to tame Canada's real estate market, the market itself has been stabilizing over the past few months and is expected to cool in 2016, making Ottawa's moves redundant, said Gurinder Sandhu, the Ontario-Atlantic Canada vice president of Re/Max Integra.
"We're seeing the markets kind of take care of that on their own," he said.
"So, this type of regulation at this point in time wasn't really required.
Re/Max predicted this week that price increases in the country's hottest markets will be muted in the year ahead.
Vancouver prices have increased, on average, by around 17 per cent so far in 2015, according to Re/Max, and by roughly 10 per cent in Toronto.
In 2016, the firm projects housing costs could rise in Vancouver by 7 per cent and by 5 per cent in Toronto while the rest of the country sees low single digit increases.
Even in Calgary, where an oil price shock has cost jobs and rocked the economy, home prices have been resilient, said Sandhu.
The Finance Department has tightened mortgage rules on several occasions in recent years — along with requiring stricter enforcement and management of loans — in an effort to weed out marginal buyers and excessive speculation in the housing market.
One of the changes saw the federal government reduce the maximum amortization period for government-insured mortgages to 25 years from 30 years.
But Friday's move will likely have less of an impact on the market because those previous changes forced a shift by homebuyers toward making larger down payments and taking on more conventional mortgages, said Derek Burleton, deputy chief economist at TD Economics.
"Hot markets in Ontario and B.C. are being driven by purchasers with larger down payments, whether it be millennials getting help from their parents, move up buyers, and/or domestic or foreign investors," said Burleton.
Between 2008 and 2012 insured mortgages accounted for roughly 60 per cent of the increase in new mortgages taken out at chartered banks.
That ratio has been flipped in 2015, with conventional, uninsured mortgages now accounting for 60 per cent, according to TD.
Still, the Bank of Canada has expressed concerns that too many Canadians risk becoming over-extended, especially once interest rates begin to rise.
FIVE THINGS TO KNOW ABOUT THE NEW MORTGAGE RULES ANNOUNCED BY FEDERAL GOVERNMENT
Finance Minister Bill Morneau announced Friday the government is increasing the down payment requirements for homebuyers seeking to purchase properties over $500,000. The move is designed to cool down the smoking-hot housing market in some of Canada's biggest cities. Here are five things to know about the changes:
WHO'S AFFECTED: Given Toronto and Vancouver are thought to be the targets of the new rules, first-time buyers in those cities — and perhaps their parents — will feel the pinch since they'll be required to cough up bigger down payments to get into the market. Those selling their homes in order to size up, especially in cities with hot housing markets, likely won't feel the pain since they've built up equity in those properties.
DOLLARS AND CENTS: For someone purchasing a $700,000 home — a common list price in Toronto and Vancouver — the minimum down payment required will rise by $10,000 to $45,000.
PRICE IMPACT: The influence over prices should be small given the narrow reach of the new rules, analysts say. In Toronto and Vancouver, where prices have climbed to historic highs, anyone who can't make the bigger down payment will simply be elbowed out of the way by those who can, meaning there should be a minimal impact on prices, according to Robert Kavcic, senior economist at BMO Capital Markets.
SALES ACTIVITY: Kavcic also says the fact that the changes take effect in February could result in stronger-than-usual activity in the weeks to come, with Toronto's mild weather possibly contributing to a spree, as home-seekers try to get into the market before the new rules are put into place.
PREVIOUS MEASURES: Between 2008 and 2012, four rounds of changes were made to tighten eligibility rules for new insurable loans. Among them: the minimum down payment was increased five per cent, the maximum amortization period was reduced to 25 years from 30, and the maximum insurable house price was limited to below $1 million.
