Almost a month has gone by since Federal Finance Minister Jim Flaherty made an important announcement on changes to mortgage qualifying rules, and naturally there has been much speculation and criticism regarding the policy and its effects. One vocal critic, Marcus Arkan, CEO of Syndicate Mortgages, a company that specializes in residential, commercial and construction financing across Canada, says that by comparing housing industry stats from the past year and data collected during the previous month, Flaherty’s strict mortgage policies didn’t quite have the impact the industry expected, but it has affected the market by making buyers more cautious, thus reducing the number of them.
News sources including the CBC and Huffington Post confirm that the aggressive Toronto housing market had helped push up the price of homes by 0.3 before the government announced its tighter mortgage rules. These figures, however, cover only single-family homes, not condominiums and multi-unit apartments. The bullish housing market of Toronto, particularly its condominium sector, fueled concerns of a possible housing market bubble.
Arkan agrees with economists from the Bank of Canada who consider the housing market and high household debt as the two biggest domestic risks to Canada’s financial outlook. This opinion is bolstered by a new Royal LePage Real Estate survey, which states that the Canadian market seems to be at a tipping point, considering housing prices could not grow faster than salaries and the core economy. Statistics show that the hourly wages of permanent employees rose by 3.3 per cent over the year. According to the report, the prices of standard two-story homes in Canada rose by 4.7 per cent in the second quarter from a year earlier, while detached bungalows were up 5.5 per cent and standard condos up 3.3 per cent.
Under the new rules, borrowers will be able to use up to 80 per cent of their property’s worth as collateral for home-equity loans, a figure down from 85 per cent. Also, the maximum amortization period has been reduced to 25 years from 30 years for government-insured mortgages. Flaherty also asserted that government-insured mortgages will be limited to homes with an acquisition price of less than $1 million.
“Mr. Flaherty said that the changes are supposed to cool down Canada’s housing industry. However, current stats suggest that the market was already beginning to cool down without any intervention, so it may be some time before the compound effect of these changes will become noticeable,” said Arkan.
Toronto contractors may not be reading the signs right
Using statistics from the Royal LePage’s survey and the Toronto Real Estate Board (TREB), as well as a recent statistic published in The Globe and Mail, the number of Toronto’s building permits is increasing despite a lower number of sales in recent months, which Arkan warns may indicate a severe supply-demand crisis ahead.
According to The Globe and Mail, home sales in Toronto dropped 1.5 per cent in the month of July, while the number of building permits increased to 21 per cent during June and July. Arkan believes contractors and investors might be overlooking the sales slump due to steep prices, and says, “The prices are still high although the rate of price-increase has noticeably decreased after the new law. Yet, with new homes going out of reach for so many people now, many of the new built units will remain unsold and unoccupied. This situation will be a huge blow on Toronto’s economy.”
Arkan believes his predictions are strongly backed by data released by condominium market research firm Urbanation, which said recently that the number of unsold units in Toronto was alarmingly high during the second quarter. While the rise in construction permits was seen for almost all sorts of homes including single homes, a rise in condo units was most noticeable.
Currently, the number of new condo buildings under construction is at a record high. However, the sales trend revealed by data from TREB indicates buyers’ inclination toward single homes instead of condos. Similar facts were also included in a recent report by CMHC, which reveals that more than enough condo units are being built in the area. According to Arkan, this may be due to a mismatch between the demands of buyers and what contractors are offering.
Contrary to the situation in Toronto, Statistics Canada states that the number and value of building permits in other parts of Canada fell 2.5 per cent since the new mortgage rules were implemented. This includes residential and non-residential sectors in major markets including Alberta and British Columbia. According to Arkan, this may become a very unhealthy situation for Toronto’s market. “Mr. Flaherty might be very happy to see the sales going down and market finally cooling in the GTA. [But he] must understand that if investors and contractors don’t keep the demand in mind, the market will soon enter a situation worse than the bubble.”