The New Mortgage Rules in Canada
The newly elected Liberal federal government made cooling down the sizzling hot real estate market a top priority. They’ve demonstrated this sense of urgency by introducing new legislation to temper escalating home prices, as one of their first orders of business. These new laws were made active a week ago, and analysts and commentators online are debating whether or not they will be effective. After the record breaking 2015 with regards to home sales and prices, Canadians unanimously agree that there is an issue of affordability, particularly in the hottest housing markets like Toronto and Vancouver.
The Canadian Mortgage and Housing Corporation now requires a 10% down payment on the portion of any mortgage it insures over $500,000. The 5% rule remains for the portion up to $500,000. What this means in practical terms, according to the Toronto Star, anyone buying a home for $700,000, for example, means the minimum down payment will rise to $45,000 from $35,000. Any home under $500,000 still requires only a down payment of 5%. Homes that cost more than $1 million still require a 20% down payment.
The Major Issue with the New Legislation
The problem, according to some, is that the new measures unfairly affect the buying potential of new homebuyers looking to enter the market. Higher down payments mean fewer young homebuyers will be able to afford a home, and perhaps that’s the point. Demand for homes is unlikely to change, if anything, it’s bound to increase as the population in Canada’s major cities continues to grow. The new laws are clearly intended to target supply: fewer homes being purchased translates into more homes available on the market, which should, theoretically, drive down prices.
Jillian Bell of CBC News asked several economists what alternative measures the government could implement to slow down Canada’s big-city housing markets. Each solution identifies a different root cause for the country’s housing affordability issue that the new measures don’t address.
The Effect of Foreign Investment on Prices
According to John Andrew, director of the Queen’s Real Estate Roundtable, foreign investment in high-end properties is what’s causing prices to skyrocket, especially in Vancouver. The solution, in a nutshell, is to tax foreign property owners more heavily, which is harder than it sounds, because the government would “first have to do its due diligence when it comes to identifying foreign buyers who hide behind a Canadian friend or relative.”
Andrey Pavlov, a real estate finance professor at Simon Fraser University, agrees that foreign owners should pay more taxes, arguing that, as the law currently stands, most foreign home investors pay practically no taxes in Canada. The reason for this is that the current law only requires foreign investors to pay tax on their Canadian income, as opposed to their worldwide income. The solution is for the government to change the definition of residency “so that someone who owns a $4-million home in Vancouver pays taxes on their worldwide income, not just on their Canadian income, which is typically zero.”