Part 2

Canada’s housing market is hot. There’s little doubt about that when many communities are seeing home prices up 20% or even 30%+ compared to a year ago.

The question is what can be done about it without risking a housing downturn.

In our last post, we reviewed some of the arguments for and against one of the more controversial suggestions being talked about, which is the introduction of a capital gains tax on the sale of primary residences.
Given the widespread opposition likely by homeowners—not to mention questions about its effectiveness on controlling price growth—many observers say any move to remove the capital gains exemption on primary residences is highly unlikely.

So, what options are left?

Last week, we saw the introduction of the first of what’s expected to be additional measures to help cool the market. The Office of the Superintendent of Financial Institutions (OSFI) unveiled proposed changes to its mortgage stress test on uninsured mortgages (typically those with a minimum 20% down payment).

Pending public consultation, the changes would see borrowers applying for an uninsured mortgage qualify at their mortgage contract rate plus two percentage points or 5.25%, whichever is higher. The current minimum stress test rate is 4.79%. Experts say the change will reduce buying power by 4-4.5%, with the impact to be felt most by first-time buyers.

Here are some other options that are on the table for policymakers:

1. Increase the insured mortgage stress test: The Department of Finance oversees the stress test applied to insured mortgages (generally those with less than a 20% down payment). Following OSFI’s announcement last week, the Minister of Finance said this: “We will continue to monitor housing market conditions across the country. To inform potential steps the government may take, we will closely examine the results of the consultation announced by the Superintendent of Financial Institutions.”
2. Reduce maximum debt-service ratios: The Canada Mortgage and Housing Corporation (CMHC) already tightened its underwriting standards last year by reducing the minimum debt-service ratios for both total and gross debt calculations. The other two private mortgage insurers, Canada Guaranty and Sagen, did not follow CMHC’s lead.
3. Raising minimum credit scores: This was also adopted by the CMHC in 2020 when it raised the minimum credit score needed for an insured mortgage to 680 from 600.
4. Raise interest rates sooner-than-expected (Bank of Canada): This would go against the BoC’s repeated messaging that interest rates would remain low until 2023.
5. Limit equity take-out through refinancing to 65% instead of 80%
6. Raise the minimum down payment from 5% to 10%: In 2015, the Department of Finance took a small step in this direction by raising the minimum down payment to 10% for the portion of a mortgage above $500,000, up to a maximum of $1 million.
7. Introduce a new foreign buyer’s tax: This could be a national version of the 15% Foreign Buyers Tax that was introduced in B.C. in 2015 and Ontario in 2017.
8. Increase minimum default-insurance equity level from 20% to 25%
9. Policies that encourage more housing supply: Many observers say policies geared at ramping up housing supply to meet the current demand would be most effective at reducing the upward pressure on prices. This, of course, is not a short-term fix.  

With the federal budget to be tabled on April 19, watch for some kind of response from the Liberal government to be seen to be doing something to tackle the issue of high home prices.

Whatever they decide to do, Liberal MP Adam Vaughan recently reminded us that there’s “no magic switch” to reset home values.

“When people tell you they want to cut housing prices by 10%… there is no magic switch in the Finance Department or the Bank of Canada where you just go to it and reset everybody’s home equity rates and housing prices across the country,” Vaughan, whose portfolio includes housing issues, told BNN Bloomberg this week. “Nor can you compel people to sell for less than the house is worth.”

If you’re a current or prospective homeowner and want to know how any of these potential changes might impact your financing plans, speak to a mortgage broker who can explain your options and help you make an informed decision.