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Tighten Up: Mortgage Rules Get Stricter

As uncertainty caused by the COVID-19 pandemic has rippled across the global economy, “business as usual” looks a lot different than even six months ago. BC may be in Phase 3 of our COVID-19 Restart Plan, but we’re far from out of the woods with no vaccine yet in sight. Even as we’ve adapted to the changes necessitated by physical distancing, experts predict months, if not years, of consequences for the housing market.

The latest change to hit the real estate market came in early June when the Canada Mortgage and Housing Corp (CMHC) announced strict new mortgage insurance rules effective as of July 1st. If you’ve been keeping an eye on the CMHC, this news won’t surprise.

The CMHC’s predictions
The government-backed CMHC is the largest insurer of residential mortgages in Canada. In a special edition of their Housing Market Outlook published in late May 2020, they took an aggressive stance in forecasting a historic recession for the housing market. The CMHC predicted “significant declines in all housing indicators,” with “severe loss in household income and employment, and migration at a standstill contribut[ing] to unprecedented falls in construction activity and sale.”

In this report, the CMHC also predicted that selling prices would fall between 9 and 18% from pre-pandemic levels, with a full recovery not forecast until 2022 or later. It’s important to note that this predicted drop is a national average—provinces that aren’t reliant on the energy industry, like BC, will prove more resilient.

What do these changes look like?
The tighter rules now in effect are expected to have the most significant impact on first-time home buyers.

Measures include:

  • Capping borrowers at spending 35% of their gross income on housing (from 39% previously)
  • Limiting borrowers to borrowing up to 42% of their gross income (from 45%)
  • Banning non-traditional sources of a down payment (like credit cards, existing lines of credit, or other lending sources)
  • Raising the minimum credit score for a potential borrower to 680 (from 600)
According to RateSpy.com, these measures will effectively reduce homebuyers’ purchasing power by up to 11%.

One major component has gone unchanged, though: the CMHC has not increased the size of minimum down payments, which remain at 5%.

Evan Siddall, president and CEO of the CMHC, explains that these restrictions are designed to limit “excessive demand and unsustainable house price growth” by controlling debt and protecting lenders from high-risk borrowers, ultimately steadying the economy.

Will these changes have an impact on your real estate transaction?
Not necessarily. If you’re not a risky borrower in the eyes of the CMHC, these changes may not apply at all.

If you do find yourself excluded by these restrictions, there are other lenders you can choose to work with. Canada’s private-sector providers, Genworth and Canada Guaranty, have decided not to tighten their restrictions, so you still have options.

The CMHC’s forecast for the housing market is more drastic than others predict, and it’s particularly notable that the private-sector providers, usually in lockstep with the CMHC, haven’t made similar changes.

How will Vancouver be impacted?
In the CMHC’s most recent Housing Market Outlook Special Edition, which focused on Canada’s major markets, they noted that Vancouver’s outlook differs from that of a city like Calgary.

“Following the immediate shock to the economy, we expect housing starts to begin recovery by the end of 2020 to a pace in-line with household formation and economic growth of the region,” they noted.

“To some degree, the Vancouver ownership markets are less exposed to the impacts of rising unemployment and a closed border, while the rental market is more sensitive to the shock,” the CMHC continued. While rental demand may drop, especially with young migrants no longer travelling here for work or school, the ownership market is more insulated.

In the Real Estate Board of Greater Vancouver (REBGV) ‘s most recent update, we saw that Metro Vancouver’s home sale and listing activity began to return to more historically normal levels in June, and analysts are optimistic for the near future.

Talk to an expert
Still confused by what these changes mean for your home buying or selling prospects? If you’re looking for an expert’s guidance, Stilhavn REALTORS® are here to help.

If you’ve got questions about buying or selling your home, get in touch today!