A dramatic change is set to take place on October 17, 2016, that will affect the Toronto real estate market. The new requirement that goes into effect isn’t entirely new. It has previously been applied to certain types of mortgages. This new mortgage rule set for mid-October will put added strain on buyers, limiting their borrowing power. All insured mortgages, including fixed-rate mortgages with terms that have a minimum of five years, will be affected. The bottom line is that a stress test will be applied to mortgage applications that evaluates the ability of a borrower to make mortgage payments with higher interest rates. This translates into an 18 percent reduction in the value of the home that can be purchased.
The stricter filter means that the average first-time home buyer who earns $80,000 annually and has a down payment of $40,000 can purchase a home with a maximum value of $425,000; for the short period between now and when this requirement kicks in, the maximum value available to the same homeowner is $520,000.
First-Time Buyers are Squeezed Out
There are various ramifications to the new mortgage requirement put in place by the federal government for the purpose of bringing the real estate market under control. One is that there will be fewer first-time buyers, and the rental market will see a growing demand.
One area that may not be affected to a great extent is the detached housing market. Detached houses for sale in Toronto are, on average, $1.29 million. The law requires that a minimum down payment on homes priced above $1 million is 20 percent. It is, rather, the condo market that will see the most change.
Homula real estate search readily shows that Toronto condos are generally below $1 million, and down payments made on condos are typically less than 20 percent. With lower price points available to new buyers, the condo market is likely to be significantly impacted. The rental market can be expected to shift into a more positive outlook. When there is a crisis in home affordability, a rental mindset is forced upon the culture. A glaring outcome of this change is that rental housing will need to be built that is more affordable. Toronto shares in the Canadian cultural tendency to value home ownership above renting, no doubt making this change one that is certainly not good news for the middle class.
Multi-Nation Mortgage Trend
This October change is along the lines of what people in Canada have been going through in recent months, as well. Dreams of homeownership are becoming more distant here, as well, for people with low incomes and middle incomes. The squeeze here is also both on home ownership and on the cost of rentals. People with credit scores battered by the recession are having more difficulty than ever overcoming hurdles inherent to the tighter lending standards and higher rental costs.
Recent Deterioration of Middle-Income Housing Toronto
An analysis was done of the years 2000 through 2015, and it was discovered that home prices rose faster than income in Toronto and 34 other Canadian markets. While the average was 3.3, in Toronto, house prices rose more than 4 times the rate of household incomes. With mortgage interest increases, significantly fewer households will be able to qualify for a mortgage. Even if you find a real estate agent Toronto who can help with a MLS listing search, the combination of higher housing prices and stricter application requirements means that an increasing number of would-be homebuyers will end up being forced into renting. In Toronto, all of these changes are pronounced because the region has the most restrictive land-use regulations.
Five factors have been found to slow down the availability of new housing in cities, and these apply to Toronto: The prevalence of rezoning, the average timeline for approval, uncertainty with regard to timeline, impacts of community and council, and associated fees and costs. Neighborhood growth, for instance, can be cut by 50 percent if the average timeline for approval of a residential development is increased by six months.
Supply limits have come in various residential areas just as demands have expanded. The constraint in supply means that prices are rising. The benchmark of luxury has a much higher price tag than before. The number of homes selling for $1 million or more has grown by 65% in the first six months of 2016. The price tag for a luxury home in Toronto has jumped from $1 million to about the $2.5 million mark.
Social and Economic Consequences
The shifting landscape of home buying potential leads to social and economic consequences. A common outcome of such changes as the new mortgage requirement is urban sprawl. People are compelled to move beyond the invisible lines marked by changes in housing regulations.
Another factor related to high costs in housing is that the market’s natural elasticity is negatively impacted. Investors and mega-landlords buy huge swaths of real estate because they can afford to. Neighborhoods change more quickly as a result of investor-driven developments.
New Mortgage Rules
In the U.S. and now Canada, tighter standards for mortgage lending make it almost impossible for middle-income families to afford buying a new home. The demand for rental properties will increase, which will also drive up the cost of renting. Ultimately, what happens with this type of shift in the real estate scene is that people can end up spending more than half of their income just to cover rent or mortgage costs. The standard recommendation is that no more than 30 percent of household income be spent on housing. This dilemma in Toronto could lead to population migration. It will naturally mean that less income is available for other necessities, such as clothing, health care, and food. The overall economy is impacted when there is less for consumers to spend on such things as eating out at restaurants and shopping at malls.
Hundreds of thousands in the Toronto area alone are likely to be forced into surrendering their housing preferences as well as their aspirations for home ownership, with these new mortgage rules.