CMHC to review down payments on investment properties as part of federal strategy to tackle housing risks

  1/13/2022 |   SHARE
Posted in Canadian Housing Market by Becky LuDo | Back to Main Blog Page

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The federal government is planning to review the rules surrounding down payments on investment properties in a bid to curb speculation in red hot housing markets, with increases in the downpayment or restriction on the source of funds the most likely measures it might pursue, according to industry experts.

The review was one of a series of measures to combat soaring housing prices laid out within the Fairness in Real Estate Action Plan in the mandate letter from Prime Minister Justin Trudeau to Ahmed Hussen, the minister responsible for housing, in December.

The Ministry of Housing and Diversity and Inclusion, in partnership with the Canada Mortgage and Housing Corporation (CMHC), told the Financial Post that speculative investing in residential real estate has become an important concern, prompting Canadians to overbid on properties, borrow beyond what they can afford, and push home prices even higher.

“That’s why our government is looking at every tool at our disposal to tackle these challenges head on. That includes the Fairness in Real Estate Action Plan,” the statement read. “By developing policies to curb excessive profits in investment properties, protecting small independent landlords and Canadian families, and reviewing the down payment requirements for investment properties, we are targeting the issues the market is facing from multiple angles.”

They had no further details on what the down payment review for investment properties could look like at this time. Currently, investors must make a 20 per cent down payment, a measure that was put in place in 2010 to curb risks in the housing market.

“A five-percentage point increase in the minimum down payment would slow investor purchases incrementally,” mortgage expert Rob McLister told the Financial Post in an email. “A ten-percentage point boost would curb investor purchases more noticeably. A 15-percentage point bump in rental down payments (or a 35 per cent down requirement) would substantially slow investor purchases.”

McLister added that he suspects regulators might also curb the use of borrowed money (such as from HELOCs) to fund down payments for rental properties.

John Pasalis, president of Toronto housing data firm Realosophy Realty Inc., agreed that increasing the minimum down payment requirement would be the simplest way to curb speculative demand, but warned that it wasn’t just pure speculators who buy investment properties.

“The other segment of investors … is people who own properties and are upsizing, but keep their current home as an investment property,” Pasalis said. “It makes it harder to hold on to two properties at once when you increase the amount of capital you need to finance that secondary property.”

Pasalis said some kind of measure to slow demand was needed, rather than focusing solely on supply-side solutions.

“If you look at every speculative housing bubble in history, they’re driven by investors. Even cities with the most elastic supply, meaning the housing markets could easily respond by building more … no matter how much supply they build, it didn’t prevent a housing bubble,” he added. “When the mood is very exuberant, you can’t build fast enough.”

The Bank of Canada raised a red flag on speculative investors in the market in its November biannual review. The bank’s report found that home purchases by investors jumped 100 per cent during the pandemic, far outpacing first-time homebuyers and even repeat homebuyers.

Bank of Canada deputy governor Paul Beaudry was among those warning that investors rushing into the housing market could pose risks to the broader financial system.

“A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year,” Beaudry said in a speech to Ontario’s securities watchdog. “In such a case, expectations of future price increases can become self-fulfilling, at least for a while. That can expose the market to a higher chance of a correction. And, if one occurs, the damage can spread far beyond the investors.”

He added that fear-of-missing-out buying could further divorce home prices from fundamentals and increase the risk of a correction.

Concerns of speculation come as the average home price in Canada cracked a new record in November at $720,850, according to the latest data from the Canadian Real Estate Association. The price momentum was largely driven from markets such as Toronto and Vancouver, which reported record home prices in December. Toronto’s average home prices reached $1,095,475 in 2021 , according to the Toronto Regional Real Estate Board.

Peter Routledge, superintendent of financial institutions, has warned that lending products backed by housing could further inflate the issue.

“Non-traditional housing-backed lending products like combined mortgage-(home equity line of credit) loan plans (‘CLPs’), which can have re-advanceable structures embedded within them, may be simultaneously fuelling and helping Canadians afford rising home valuations,” he said.

Throughout the pandemic, the surge in housing demand was largely driven by low interest rates and the desire for more space. However, the Bank of Canada’s research revealed that investors have been taking advantage of cheap borrowing to snatch up more homes, whether they’re used as rental properties or otherwise.

The 20 per cent down payment requirement for investors took effect in 2010 and, in 2016, the federal government ceased default insurance for single-unit rentals, which McLister said incrementally elevated borrowing costs on these types of properties. There was a time in 2007 when investors could purchase a one-to-four-unit property with little or no down payment, underscoring how far regulations have come over the years.

“Damage from a housing sell-off can drive the whole economy into recession if it’s severe enough, given the wealth and liquidity of millions of Canadians’ are tied to their home value,” McLister said.

Source: Financial Post



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