Month: July 2018

The Canadian economy has been growing robustly in recent years and this has reflected very strongly in the growth witnessed by the Greater Toronto Area as well. But something interesting has happened in recent times in this region: the decline in the housing market of Toronto region.

The data that came out recently has shown a big fall in sales of houses in this area. As per the Toronto Real Estate Board (TREB), the decline has been 40.4 percent in home sales. But here is the interesting part: This decline in the housing market of Toronto region is actually good for the economy. The housing sector of Toronto has been a bubble for quite some time and was worrying economists.

The decline in house prices will not only deflate the bubble but will also lessen the dependence of the Canadian economy on real estate sector which was sucking up a large share of the pie.

One of the causes of this decline in the housing market of Toronto region may well be the change of rules brought about by the government in the mortgage sector. The mandatory requirement of stress test for borrowers paying 20% or more of their loans in down payment seems to have changed the behavior of new entrants into the housing market.

Estimates suggest that the average purchasing power of members belonging to the crucial demographic section called the peak millennials has come down by 16.5 percent which roughly amounts to $40,000. These new buyers have felt discouraged by the rule changes and have decided to seek houses outside the downtown area of Toronto.

The peak millennials essentially consist of persons born between 1987 and 1998 and are the most likely to look for new houses. The high prices they are forced to confront in the housing market of Toronto region are way higher than that in other parts of the country. On top of that, the requirement that they should be able to pay an interest rate on their mortgage loans that are 20% higher than the actual rate at which they have borrowed has led to their migration and decline of the housing market of Toronto region.

In order to ensure financial stability, the Canadian Government in October 2017 decided to introduce new rules for mortgages. These apply to all mortgage loans with 20% or more of down payments from January 2018.

The new rules for mortgages state that all those borrowers who have made a down payment of 20% or more on their mortgage loans would have to undergo stress tests regarding servicing of these loans. This rule was already in place for people with less than 20% down payment since January of 2017 and now has its scope expanded. So, if you are a resident of Mississauga area and want to move into a new and better home, you would have a slightly tougher challenge in securing a mortgage loan.

The stress tests will be faced by not just those getting a new mortgage but even those renewing or refinancing one. These tests would involve an evaluation of the recipient’s ability to cope with interest rates which are higher than what they are currently paying.

Since July 2008, when the world was hurtling towards recession, the Canadian authorities have introduced seven new regulations in the mortgage market. The idea behind these new rules for mortgages is clear: to ensure that Canadian financial institutions don’t emulate their American counterparts by taking more debt than they can manage. It is worth noting that Canada’s economy was one of the less-damaged ones from the recession of 2008.

Market experts estimate that around 100,000 prospective home buyers would be affected by these new rules for mortgages and be rendered unable to draw a mortgage loan. This change will have different effects on those taking a new mortgage loan and those who are renewing it.

Those applying for a new loan will have to, in case of failing the stress test, look for a smaller loan or simply keep accumulating their income till they have the means of not failing the stress test.

On the other hand, those renewing their mortgage may be safer as the lenders are not required to put their clients through the stress tests. But this means you won’t be able to go elsewhere or borrow at a better rate if you are unable to pass the stress test.

Overall, considering the success of the Canadian government in steering the economy through choppy waters, you can’t fault them for being cautious and introducing these new rules for mortgages.