Photo: Blok 70/Flickr
Not everyone thinks the recent mortgage rule changes to increase the minimum down payment on homes priced between $500,000 and $1 million are enough to cool the country’s hottest housing markets.
Just look to Vancouver, one of the cities the rule changes targeted and also where an “emergency” community meeting last month attracted hundreds “to discuss the causes of, and solutions to, an out-of-control real estate market in the Lower Mainland.”
While a number of observers — including two BuzzBuzzHome surveyed — aren’t calling for further action from any level of government, clearly concern exists over housing affordability out west and in Toronto, too.
So what more could be done to cool these hot housing markets?
Tweak requirements in the mortgage qualification process
Brian DePratto, a TD Economist, says altering exactly how homeowners qualify for mortgages could contribute to cooling overheated real estate markets.
“One thing that springs immediately to mind are the rules around qualification in general, so for lending, in terms of ratio of mortgage payment to income, that’s something that can be shifted up or down,” he tells BuzzBuzzHome News.
The total-debt-service ratio, which looks at how much of a mortgage applicant’s total income will go towards housing expenses, is limited at 40 per cent.
DePratto suggests lowering ratios can dampen markets’ performances. “That would be a potential avenue that would reduce qualification for a number of people,” he explains.
Another step during the qualification process also presents an opportunity for tightening, he adds.
When consumers are qualifying for a mortgage, testing is done to see whether they can afford not just the current posted rate but also potential higher rates in the future, says DePratto. “Government could increase what [future rate] someone is tested against,” he suggests.
Make lending for mortgages more expensive for the big banks
Robert McLister, founder of RateSpy.com, a website that helps consumers find and compare mortgage rates, says “the short answer” to cooling housing markets is “make housing less affordable.”
One idea McLister floats is “increasing lender capital requirements,” a move that the Office of the Superintendent of Financial Institutions announced late last year that it was working on.
Heftier requirements require banks to earmark a higher sum of money for mortgage loans they offer to guard against the impacts of consumer defaults.
“Having to keep more money in reserve could reduce their appetite to loan out more money to would-be borrowers, which could work to cool the housing market,” according to a CBC article, which says these rules could be implemented by next year.
McLister notes “there is always incentive for banks to lend,” but adds, “higher capital requirements simply make it more expensive to lend. Banks react by raising rates and/or incrementally tightening their underwriting guidelines,” he writes in an email to BuzzBuzzHome News.
Though this method could chill activity and price growth, its impact is “typically marginal,” says McLister.
Create a special tax targeting foreign buyers
Several Vancouver economists recently outlined a BC Housing Affordability Fund that would draw on a 1.5-per-cent “property surcharge” implemented locally from jurisdiction to jurisdiction within the province.
“The tax would target owners of vacant properties and those with limited economic or social ties to Canada,” the economists specify in a proposal document. “All other owners will be exempt.”
A number of exceptions have been proposed to ensure this. For instance, if you declare a home as your primary residence or are a veteran, retired, or disabled resident, you would not have to pay into the fund. Similarly, if households pay federal or provincial income taxes, owners can use the tax payment amount towards fund contributions.
Revenue the fund generates would then be distributed among Canadian tax filers in the areas where it has been established.
The economists argue such a tax would make the province “a less attractive target for investors who wish to avoid taxation or park cash in residential real estate,” factors some say have driven up prices in both Vancouver and Toronto.
“Based solely on vacancy data, we estimate the surcharge could provide residents with roughly $90 million per year in Vancouver alone,” reads the proposal document.