New mortgage rules go into effect today, making the rules for borrowing much more strict. While the changes are meant to protect Canadians, the average household won’t be able to buy a home. If that weren’t crappy enough, lower priced homes may have to come down in prices too. This might be a double hit to lower income Canadians.
Canada’s New Mortgage Rules
The new rules are being billed as a “stress test”, but are just a more strict loan criteria. Buyers that need mortgage insurance, will now qualify using the Bank of Canada (BoC) rate. While that doesn’t sound like much, the rate today is close to twice as high as the lowest rate we could find. While they won’t have to pay more, they will be able to borrow substantially less.
Canada’s Median Income And Mortgages
How people were purchasing homes barely made sense, and it makes less sense from today on. The annual median household income in Canada is now $78k, giving your insured borrower a mortgage of $269k. This plus the downpayment they save is what the average Canadian has to work with – which isn’t a lot.
Incomes actually get worse in Canada’s largest cities. In Vancouver, the playground for Asia’s super elite, the median income is $76k. That’s enough for a mortgage of $258k. As for Toronto, the country’s economic engine, the median household income is only $74k a year. This qualifies your median Toronto household for a mortgage of $248k. If you’re thinking these numbers seem small for the homes in Canada, you’re right.
Average Home Prices Across Canada
If you were hoping to get a home with 5% or even 10% down, good luck. The average benchmark home in Canada is $456,722. That’s a $187,722 gap between what the median household needs to buy, even if you can find a mortgage rate you can carry.
To qualify for more using a discount rate, you’ll have to have a downpayment big enough to skip insurance. Currently banks require at least 20% for those, so you’ll need $92k for an average home downpayment. Up to yesterday, you could have locked in a mortgage with almost half of that downpayment.
In Toronto your average home is $755,755 – that’s 10x the household median income. A buyer there is looking at a $507k gap between what they can borrow today. Or they can grab a $151k downpayment and bring that gap down to $424k. That still doesn’t find them enough cash, even though people seem to be buying homes at a pretty rapid rate. Makes me think Marc Cohodes might be onto something when he says Ontario is rife with mortgage fraud.
As bad as it is in Toronto, homeownership is pretty much out of reach for anyone in Vancouver. The average home in Vancouver goes for $931,900, making it more than 12x the household income. On your average income, well….prices would need to come down by more than 50% for home ownership to make sense there.
Note: Experts recommend purchasing a house that’s 2-4x your household income. This pretty much means experts also recommend not purchasing an average house on your average household income in Canada.
Impact On Canadian Home Prices
Now you’re wondering how this may impact home prices. High priced homes likely will see minimal impact from this rule. The average detached home in Vancouver is $1.57 million, and $1.29 million in Toronto. Buyers for these types of properties had to have over 20% prior to the rule, meaning nothing changes for them.
If you’re unloading a mansion in Rosedale or West Point Grey, your buyers aren’t affected by this. If you’re trading up from that starter condo you scraped to buy, you might be in trouble. Your buyer now needs to save for twice as long as you did, making your qualified pool smaller. Prices can either drop to their level, or people can move a lot less and wait for inflation to push prices higher.
Class Mobility In Canada
This brings an interesting social problem Canadians haven’t dealt with before, class mobility. First time buyers over the past 30 years have been able to trade up fairly fast. The appreciation of home values has been adding to the average Canadian’s net-worth. If the bottom has fewer people to trade their homes too, prices won’t appreciate as quickly – if at all. If the average Canadian has been using their home to add to their net-worth, that’s going to come to an end.
Take your pick, price houses can drop, class mobility will decrease, or wages will have to soar. Judging by wage growth in Toronto and Vancouver, the last option is unlikely. That leaves two options as far as I can see, and both mean the housing turmoil is going to get worse before it gets better.