September monthly numbers are out. Sales are second only to September 1992 while residential months of inventory and inventory as a whole are both at record lows. More on this later in the week but there wasn’t anything groundbreaking here we weren’t already expecting. The only strange thing is that the VREB headline reads “Victoria Housing Market Chills Out For Fall” which is an odd way to describe a market so strongly tilted towards sellers.
More importantly, as predicted the feds have issued more regulatory changes to try and halt the runaway markets. Coming as they do on top of the provincial changes, these regulations are all piling on without any waiting period to gauge the effect of the first. While probably positive in restoring some sanity to the markets, this is the mark of panicked regulators more than a measured, coordinated approach.
The changes are primarily three-fold:
- Forcing the reporting of the sales of real estate that is being claimed as a principal residence to the CRA. This will crack down on fraud where foreign and domestic speculators claimed principal residence status to avoid the capital gains tax. While another nail in the coffin of Vancouver, this will have minimal effect on Victoria.
- Requiring all new insured mortgages (less than 20% down) to qualify under the benchmark rate (currently 4.64%) rather than the discounted rates you will actually pay that are some 2% lower.
- Drastically limiting bulk insurance for lenders. Only mortgages under $1 million that are owner occupied and with amortizations 25 years or less will be insurable. According to the industry, currently about half of bulk insurance loans have amortizations longer than that. Will drive up rates for conventional mortgages.
Prior to now, only mortgages with less than 5 year terms had to meet this test, which drove most people into the popular 5 year fixed option (a whopping 72% of buyers choose a term of 5 years or longer according to 2015 data). That change is the biggie for us because it hits the regular purchasers that form the majority of the market. Local broker Mike Grace has summarized the anticipated impact well in the comments already so I won’t try to improve on that:
1) First timers, and high ratio borrowers will be forced into cheaper alternatives for housing, get ready to see an increased demand for condos, and cheap cardboard cutout developments out in the Westhills.
2) Increased wealth transfer between parents and grown kids. This may cause parents to pull equity out of their family home to assist kids.
3) Price drops? It’s possible for sure, but in Victoria with inventory being so tight, this may not happen immediately following the changes. Nice that the changes are happening during a seasonal slowdown, and nice that the new rules aren’t being applied to renewals. Shopping around at renewal time just got near to impossible for lower income high ratio borrowers – a good portion of the market will likely get gouged by there banks at renewal.
How many people will be affected in Victoria? Well data on this is scarce but the VREB used to send out surveys to realtors on the characteristics of their buyers.
I dug up one from 2011 Marko provided up to date surveys which indicate that 17% of purchases were bought with less than 20% down (and thus required insurance).
If those surveys accurately reflect the market, the new regs would have affected some 94 buyers last month. Nationally, buyers are in the habit of borrowing an average of 93% of their maximum, so there isn’t a lot of wiggle room there.
Of the people that are hit by this, it will reduce the maximum mortgage amount they can qualify for by about 20%. 12% of buyers being able to buy 20% less house will likely take some of the wind out of our sails, especially as this affects first time buyers (pure demand) disproportionately. There are also changes to the bulk insurance regulations that may push rates up a bit for those with conventional mortgages.
By the way, funny coincidence. The last time they instituted this change (qualifying variable and fixed terms under 5 years at the posted rate) was April of 2010. One month later our market turned downwards.