The Impact of the Stress Test
In October 2017, Canada’s banking regulator (OFSI) announced changes to how lenders qualify Buyers. In short: effective Jan 1, 2018, home buyers need to qualify for a mortgage at the greater of the Bank of Canada’s five-year posted rate or 2% higher than the negotiated contract rate…. thus reducing how much money people can borrow.
What happened after the stress test was announced:
We did see some Buyers eager to secure a home before the new changes came into effect and their maximum lending/budgets were forcibly reduced. But interestingly, it wasn’t a stampede of buyers. What does that mean? What we already knew: most Toronto buyers aren’t buying at the top end of their lending limit anyhow, so the changes likely won’t affect that many people. Experts estimate it will impact 10-15% of buyers.
While the new rules came into effect January 1st, Buyers who had been granted firm mortgage pre-approvals by December 31st were given a 120-day extension to find a home by many of the big banks.
Our prediction? The market has been on a roller coaster for a while now, between the Ontario Fair Housing Plan, the stress test and increasing interest rates, the psychological impact of the changes is declining. I expect we’ll see a much more balanced market in 2018 (and that’s a good thing).
Continued Impact of the Fair Housing Plan
In April 2017, Premier Wynne announced a whole bunch of changes to cool the real estate market, including a Non-Resident Speculation Tax (NRST), new rules dictating landlords and tenants, and a mixed bag of other election-friendly changes.
The impact was swift and significant:
- Properties stayed on the market longer.
- We wiped out the market gains of the previous year, and lower prices became the norm.
- The tenant-friendly rules aimed at making the Toronto rental market more affordable backfired, as builders cancelled new dedicated rental projects and homeowners opted to convert their basements into their own space instead of renting them out and dealing with the new rules.
What lies ahead in 2018? To be honest, I think there was an overreaction to the Ontario Fair Housing Plan announcements, and in the last months of 2017, we started to see a retreat from the fear and Buyers returning to the market. And: as it turned out, non-resident buyers weren’t that big of a part of the Toronto market after all – in December, CMHC revealed that only 3.4% of Toronto Buyers were non-residents.
In 2017, the Bank of Canada increased interest rates by 0.5%, and some of the big banks greeted 2018 with an additional interest rate increase. Further, there’s speculation that a couple more quarter-point interest rate hikes will be announced this year.
What do the interest hikes mean? If the Fair Housing Plan and the new qualifying rules were the one-two punch, will continued interest rate hikes deliver a knock-out to the real estate market? Let’s hope not.
Pro Tip: If you’re thinking of buying, get pre-approved for a mortgage NOW.
Airbnb and a Vacancy Tax
Not to be left out, the City of Toronto wants its piece of the let’s-mess-with-the-real-estate action.
Newly-passed short-term rental accommodation rules kick in on July 1, 2018, to deal with the influx of Airbnb rentals in the city. In short:
- Torontonians will only be able to rent out their primary residence (vs second properties)
- Hosts can rent out three rooms of their occupied home for an unlimited number of days, or rent out their whole home for no more than 180 nights per year
- Secondary suites (i.e. basement apartments) can’t be rented out by owners (but can by tenants, which is ludicrous)
- Hosts will pay the city a $50 annual fee
- Short-term booking agencies will pay a $5,000 license fee plus $1 a night per booking.
- New requirements for rules and policies about disruptive guests and noise
While we agree that some regulation was called for – the impact of Airbnb on communities is real – it does feel as though Toronto has taken this a bit too far. While fewer dedicated short-term rental condos will increase the supply of rentals, we don’t expect this change to have much of an impact on rental prices in the city.
Looking to once again follow in Vancouver’s footsteps (missteps?) Toronto is considering implementing a vacancy tax. With so little data available, this seems to be yet another decision that might be made in haste. Let’s hope it doesn’t happen.
It’s an Election Year
Both Toronto and Ontario will see elections in 2018, and real estate matters are certainly going to be big election topics. If the 2017 election-friendly moves were any indication, 2018 will likely see more changes motivated more by getting votes than by what’s right for the real estate market.