canada mortgage rules

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Since the Canadian government announced changes to the country’s mortgage and capital gains taxation rules, there’s been much discussion of how the new regulations could help to cool the housing market. TD Economics has now added its voice to the crowd, commenting in an October 20th report that while the measures may initially cause volatility, they should ultimately reinforce the housing market slowdown that is already underway.

Announced at the beginning of October, the new mortgage rules are aimed at limiting risks taken by both households and lenders, as well as at reducing speculation. The first came into effect on the 17th, and requires all new insured mortgages to face tougher stress testing; the second, which will come into effect on November 30th, will standardize eligibility requirements for low- and high-ratio insured mortgages.

The new tax measures will prevent non-residents from avoiding capital gains taxes when they sell a home, closing a loophole that foreign buyers have been using.

TD believes that separately those adjustments are “incremental in nature,” but together “will likely serve to cool the housing market alongside other dynamics that are also in place.” It’s basing its outlook partially on the fact that other recent adjustments to Canada’s mortgage and tax rules have had a similar effect — in general, they created near-term volatility before “help[ing] anchor existing home sales closer to their long-run average.”

However, the bank does admit that there are some risks to that outlook, with one of the biggest being timing. As TD explains, the new rules are “being layered on top of a number of other factors that may cool the market in 2017.” For one thing, mortgage costs could rise next year, and risk-sharing discussions with lenders could weigh on the mortgage market.

The regulations are also being introduced at a time when Canada’s biggest housing markets are in the midst of “heightened uncertainty.” According to TD, Vancouver is now undergoing a moderate correction that could be magnified by the new rules, while the frothy Toronto market could “turn quickly” if the new regulations impact sentiment. What’s more, the rules could dampen recoveries in the country’s more vulnerable markets, including Calgary, Edmonton, Saskatoon and Regina.

Nevertheless, TD emphasizes that its forecast is for the new mortgage and tax regulations to eventually help cool the Canadian housing market. Overall, it sees home sales in the country returning to their long-run average, and prices dipping slightly in 2017.

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