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Stricter Housing Rules: Brace for Impact

If you follow the real estate market—and who doesn’t nowadays?—you’ve likely noticed growing speculation about new mortgage rules.

Home prices are seemingly out of control, with national average prices up a shocking 25% y/y — amid a recession no less. “Canada hasn’t had a market overheating of this scope since the late 1980s,” says RBC.

A growing chorus of analysts now claim that the only near-term practical fix is new mortgage regulation.

Cases in point:

“If the housing market fails to moderate and/or signs of a speculative-driven bubble further mount in the coming months, policymakers could be pressed into action to cool housing activity, not unlike the macroprudential and tax measures undertaken in 2016 and 2017,” said TD. “This appears to be more of a risk for later this year or in 2022…”

But BMO says the fix cannot wait. “We believe policymakers need to act immediately,” the bank warned Tuesday.

When banks start publicly asking to be regulated, it’s usually because they already know that regulation is coming and they want to seem prudent. We still remember back in December 2010 when TD’s and BMO’s CEOs started advocating for stricter mortgage rules. Lo and behold, the very next month the Department of Finance announced a cut to the maximum amortization.

Feds Feel the Heat

Never before have so many homebuyers been so leveraged. One of policymakers’ favourite metrics, loan-to-income (LTI), shows a record number of homeowners with LTIs over 450%.

Source: OSFI

If you’re a regulator sitting at your desk in Ottawa, you’re feeling the weight of potential housing calamity on your shoulders. And now you’re hearing banks, who make billions on mortgages, tell you to reign them in on lending. What do you think a regulator is prone to do in that case?

They’re likely going to do what they did in 2008, 2010, 2011, 2012, 2013, 2015, 2016, 2017 and 2018 — announce more restrictive housing policies to slow debt accumulation and stabilize the housing market.

And, we believe from talking with well-connected industry folks, they’re going to do it in April or May—possibly even in the April 19 budget.

What Could They Do?

Here’s a sampling of potential rule changes and our valiant guesses as to the probability of each happening this year:

  • Reduction in maximum debt service ratios
    • Probability: 50%
  • Major new supply creation initiatives
    • Probability: 45%
  • Tighten rental financing guidelines (e.g., no borrowed down payments)
    • Probability: 40%
  • Higher minimum credit scores:
    • Probability: 30%
  • BoC rate hike
    • Probability: 20%
  • Increasing the minimum down payment to 10%
    • Probability: 20%
  • Increasing the minimum equity to avoid default insurance (and to refinance) from 20% to 25%
    • Probability: 20%
  • New national foreign buyer tax
    • Probability: 20%
  • Stricter capital requirements for banks
    • Probability: 20%
  • Elimination of limits on interest-only HELOC payments
    • Probability: 20%
  • Prohibition on unsecured down payments
    • Probability: 15%
  • Rigid debt-ratio limits on non-conforming loans with 35%+ equity
    • Probability: 15%
  • New limits based on the “loan-to-income” ratio
    • Probability: 15%
  • Forcing 30-year amortizations to qualify at a 25-year amortization
    • Probability: 10%
  • Lender-paid deductibles on default insurance (a.k.a., “risk sharing”)
    • Probability: 15%
  • Prohibition on blind bidding
    • Probability: 10%
  • Eliminating interest deductibility for real estate investors
    • Probability: 5%
  • Speculation tax on shorter-term property holds
    • Probability: 5%
  • Remove principal residence tax exemption when selling
    • Probability: 2%

Side note: CMHC has confirmed that it’s revamped First Time Home Buyer Incentive, which (as proposed) will allow far more buying power in greater Toronto, Vancouver and Victoria, “it is still expected for the Spring.” Critics will charge that CMHC is fueling overvaluation with this change, so expect some fireworks.

How We Got Here

Years of governmental housing supply mismanagement have added to COVID-related listing shortages and helped get us to this point. Housing inventories are at never-before-seen lows.

And of course, those aren’t the only fundamentals behind these astronomical price gains—consider the income and employment gains we’ve seen in the homebuyer demographic, record-low interest rates and record savings rates. National Bank CEO Louis Vachon says, “…I think we somewhat understand what’s behind the housing activity. It does not appear to be excess leverage.”

RBC economist Robert Hogue phrased it best last week, “One thing is certain,” he said. “There are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time.”

But the feds never let that stop them before. They’re running scared because they’ve fallen behind the curve. They’ve got to do something to counter market psychology and the melt-up in home prices, and they will.

Bank of Canada Governor Tiff Macklem told the Financial Post, “you are seeing, on average, the loan-to-value ratios are getting higher, particularly in the uninsured [mortgage] space. That suggests that Canadians are stretching and that is worrying.”

Indeed, it is systemically dangerous when home prices go parabolic. It makes more people highly vulnerable to economic shocks. But it’s even more worrisome when a record number of people think that Canada’s “house tulips” will continue growing to the sky. That perilous “extrapolative” mindset is creating beads of sweat on regulators’ foreheads.

For her part, Finance Minister Chrystia Freeland says, “We are of course watching housing markets across the country very, very closely and carefully.”

You bet she is, because she and/or the bank regulator may be about to prick the housing balloon. And if they do—and depending on what they do—double-digit home price gains could be a fond memory for at least 2-3 years.

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  • Antonino Gentile says:

    Assuming they pass some of these when will they come into effect? E.g., someone makes a down payment on a new build that doesn’t close until early 2022. How would any changes impact them?

    • The Spy says:

      Hi Antonio, In general, regulators try not to put people in a bad place if they’ve already signed purchase agreements. Although, if I’m guessing right, they’d probably set a near-term implementation date on any changes that were mortgage related (to avoid front-running).

  • Ralph Doncaster says:

    I think the Rental Construction Financing Initiative would see a lot more uptake if the conditions were relaxed.

    Hopefully you are right about supply creation initiatives, since that’s the primary problem.

  • Ryan Kennedy says:

    What kind of new supply initiatives do you think they would do?

  • Jimmy says:

    Please check housing shortage narrative. Check housing completions versus population growth and Hillard MacBeth article. This idea seems to be false and is keeping the fomo going. There is no fundemental evidence that we are short housing.

    • The Spy says:

      Hey Jimmy, There are numerous regions where the population is growing faster than new homes are being built. When a property in a “middle class” neighbourhood gets 10 bids within 24 hours of listing, that’s not an accident. That’s a housing shortage (in that market).

      If those ten buyers had nine more similar houses to choose from you wouldn’t see that same bidding war. It’s simple supply/demand economics. Such imbalances are pervasive in numerous markets and that’s what we’re talking about here.

      If you want to live in Lucky Lake, Saskatchewan, however, you’ll find a nice mobile home for $38,000 as we speak. And if that’s the yardstick for affordability then maybe you’re right and we don’t have a supply problem. Canada has many “Lucky Lakes” with low-cost housing. But unfortunately most people can’t just pack up and move cross country from high-demand markets to low-demand markets. Most Canadians are region-bound for employment or social reasons, or have more ambitious housing aspirations. And when they try to move out of expensive cities in large numbers (as we’ve seen post-COVID) many find that small towns don’t have sufficient inventory either.

      In a short, where there is excessive demand for a product that people can’t avoid consuming (shelter), more supply is always a solution.

  • Joshua says:

    Political suicide. This hurts those who can barely afford a home more than those who can fund the mortgage anyway. It’s a ridiculous idea, and will be met with more public backlash, while doing little to curb the problem. Supply is the problem. Cost of materials is the problem. You can’t solve these things by making it harder to get a mortgage and home.

  • David64 says:

    I am closing a new purchase on April 30th, and will sign mortgage docs on April 14th. Could these potential changes affect me?
    My mortgage application is already done, and purchase offer was accepted and is final.

  • Scott says:

    One of those options won’t help, a few implemented might actually cool things for some time. Here in NS I am seeing houses selling every day that there won’t be any equity in for years, the prices simply aren’t sustainable. Is there a target LTI that economists recommend?

  • Rishi says:

    In Ireland they apparently have a loan to income cap of 3.5 (with lenders allowed to breach the cap for a small subset of buyers, but even then only up to 4.5 times income). Limits that low would probably end the party in Canada pretty quickly – with a $100,000 income you could only borrow $350,000, $450,000 if you’re lucky.

    But politically it’s much easier to focus on investors alone and leave owner occupiers mostly untouched, so I’d guess governments will try to do that. The potential collateral damage (renters, if rental supply suffers) are not top of mind for politicians.

  • Rishi says:

    I had to do a double take looking at that chart. How are we seeing record high proportions with LTI over 450% when incomes in 2020 were heavily supported with fiscal policy measures? Household income rose in aggregate last year by a record amount thanks to the fiscal support.

  • Max Lewis Ricciardo says:

    Increase the requirements and interest rate for property investors that already have a principle residence. Problem solved, not the prettiest solution but other countries have done this or limited people/families on the number of dwellings they can own.

  • Jason Lambert says:

    Remove principal residence tax exemption when selling
    Probability: 2%

    Can I get a clear explanation to this? That I am understanding it correctly. Thanx

  • Jake says:

    If the Federal Government makes it *MORE* difficult for first-time buyers to get into this market, that flies in the face of common sense.

    Ex. Debt service levels from 39/44 to 35/42 or higher down payment minimums.

    That would completely slap every young person in Canada who is crying on twitter about buying property, how hard it is etc.,

    I don’t think they will go this far. IF they do, it’ll be aimed at repeat buyers and investors and NOT first-time buyers.


  • Ralph Doncaster says:

    Hillard is stuck on debt ratios, when debt service ratios are far more important. When I got my first mortgage almost 30 years ago, the interest rate was 7.9%. Two months ago, my wife and I signed an early renewal at 1.49%.
    If Hillard graphed household mortgage interest payments vs income, it wouldn’t make such great headlines.

  • cherie says:

    Is the supply issue because the housing supply being built is for investors vs. the type of housing wanted by people who want to live in them? I think it was around 40% of condos are owned by investors in Toronto and no clear picture of how many are empty, so we have no idea how much is being built and not actually being used. If people want to buy a small house with a small piece of land and the majority of supply being built is sub 600 sq. foot condos because the city planners want it that way, how will supply ever get resolved?

  • Kamal singh says:

    Any policy which can effect the first home buyer is not good. So that means we have to punish the Investor which is also not good. Any policy change will not be a easy task for government as they have to find the middle way.

  • A.b says:

    Compare Toronto to New York, London, Paris, Tokyo, Shanghai. We are so far behind. The construction industry is the only thing that kept this city alive . And some ppl like that to put to sleep! I you cant afford to live in this city , pls move out of the city . You cant put do many ppl under the bus because you cant afford it . How about putting a cap on the building materials. They went up 30 % . One sheet of ply costs 92$ . The housuse are expensive because of everything else .

  • John Thunder says:

    It’s funny how the real estate industry has everyone so fooled and in the palm of their hands. The #1 issue right now is that the blind bidding should be made illegal and moved to a complete open bidding system. That would make a much larger impact than any of the other points combined.

    A house sold here for 350k over ask, the second place bid was 32k over. Now the insane overbid is the new floor comparable for the neighborhood.

  • Elton says:

    Why all the worry about punishing the investors? It was almost unanimous in the pandemic that people hoarding and price gouging essential items should be exposed and pay for that. It was supposedly showing that not all investing are sacred.
    Why is that different for housing? It is an essential item in short supply, therefore hoarding or renting/selling at absurd prices should be strongly discouraged.

  • Ralph Doncaster says:

    @Elton, around Halifax many landlords are selling their properties, leaving tenants searching for a place to live in a very tight rental market. Instead of trying to punish landlords trying to buy existing housing stock, make it easier for them to build new stock.

  • realist says:

    In reply to Scott, regulators want to see 350% or less which is totally unrealistic for our biggest cities. If they want LTIs this low they need to close the doors on immigration for the next 10 years. Otherwise they need to shut their pie holes about LTI and incentivize more home building.

  • Harv says:

    1. Eliminate the blind bidding process. Let the rational market decide the value of the home not emotions.

    2. Open the green belt. There is no need to lock in the GTA for some trees. 90% of Ontario is forestry up North.

    3. Call BoC’s bluff and raise interest rates. If the economy is doing so well, why are we pumping it with liquidity and low-interest rates?

    4. Bring back the 40-year mortgages.

    5. Government should reduce personal and corporate tax rates to free up disposable income.

    6. Get rid of Trudeau. [In my personal opinion] he is toxic, racist, sexist, and corrupt. His number 1 goal is to destroy the middle class.

  • Scot Howard says:

    I have another idea that might help.

    Stop the ability to assign pre-construction homes/condos

    I hear all this talk about enabling new supply, but it seems like investors purchase most units during launch.

    I recently joined a Facebook assignment group out of curosity. I was amazed and how many properties are traded this way!

    If assignment were no longer allowed, I feel more new supply may go to actual end-users.

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