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Ottawa's new rules hits first-time home buyers

Michael Mikail is photographed on October 4, 2016 in the home that he rents with a friend in downtown Toronto.

Christopher Katsarov/The Globe and Mail

Michael Mikail had saved $75,000 for a down payment and secured a preapproved mortgage to buy a house in Toronto.

Now, Mr. Mikail's financial adviser has told him that he will qualify for a smaller mortgage in a city where the average selling price of a detached house was $1.29-million in September and where the bidding process has become so competitive that homes are often sold before the open house has even begun.

"This is a big blow," said Mr. Mikail, 35. "I will get approved [for a mortgage] because I have decent savings and a good job, but they will give me a lot less."

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Since Ottawa unveiled new housing rules on Monday, first-time home buyers have been thrown into disarray. The reforms are designed to cool Canada's booming housing market and ensure home owners can afford their mortgage payments.

Home buyers without a minimum 20-per-cent down payment will be "stress tested" to see whether they can withstand higher interest rates, which could cut the size of the mortgage a borrower can get.

The real estate industry is warning that the reforms will reduce a home buyer's purchasing power, drive up prices in cheaper areas or force people out of the market altogether.

"We've never been so stressed," said Kurtis Di Cioccio, who recently signed a purchase agreement with his girlfriend for a townhouse in the Ottawa suburb of Orleans, Ont.

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Mr. Di Cioccio and his partner saved $30,000 for a 10-per-cent down payment, an amount that requires mortgage default insurance. But now the couple does not know what to do, since new regulations for insured mortgages are set to go into effect Oct. 17.

"We basically have no choice but to consider the 20-per-cent down [payment], otherwise we don't know if we will be able to buy it any more, even though we signed the purchase agreement," the 22-year-old Mr. Di Cioccio said. Their house sale is due to close in November, 2017.

Soaring house prices combined with rock-bottom interest rates have pushed Canadians to take on more debt. Canadian debt levels hit an all-time high in the second quarter, with households owing $1.68 in debt for every dollar of disposable income.

Implementing "stress tests" on insured mortgages is Ottawa's attempt to ensure Canadians can make their mortgage payments when interest rates rise. Other measures introduced this week are designed to rein in real estate speculators, whom the government believes are partly responsible for driving up property values in Vancouver and Toronto.

Realtors have been racing to tell their clients that their preapproved mortgages will have to be reassessed.

"If they were preapproved with less than 20 per cent down, they will be approved for less under the new rules," said Brian Hogben, a mortgage broker in Hamilton. "This could mean relocation to a more affordable destination. It will be tough for the first-time home buyer," he said.

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According to Mr. Hogben's calculations, a family that makes a combined total of about $80,000 a year can currently afford to purchase a house up to $500,000 with a 5-per-cent down payment, at a 5-year fixed rate of 2.49 per cent.

Under the reforms, however, the same family will only be able to afford a place of up to $400,000 with a 5-per-cent down payment.

That's because the interest rate will be calculated using the Bank of Canada's conventional five-year mortgage rate, which is currently two percentage points higher than that offered by most lenders. It stands at 4.64 per cent today.

Some realtors are urging their clients to ask their family members for cash to meet the 20-per-cent down payment. That is not an option for Mr. Mikail, an IT project controller.

"My parents aren't helping me," he said.

The story is similar in Vancouver, where the average selling price for a detached house in the city was $2.6-million last month. In Greater Vancouver, the average selling price was $1.53-million.

High housing prices have Bidyut Bhattacharjee feeling discouraged. The father of two has been looking for a three-bedroom condo in the Vancouver suburb of Burnaby for two years. He has saved between $70,000 and $85,000 for a down payment.

"I would like to reduce the burden of my mortgage payment and try not to pass on the burden to my kids," he said.

The B.C. government recently slapped a 15-per-cent tax on foreign buyers in an attempt to deter real estate speculators, sending home sales in Vancouver down by a third in the 12 months to September.

It is unclear whether Ottawa's reforms will help to reduce prices in Vancouver and Toronto, given the dearth of properties for sale.

"There is a scarcity of inventory. It is difficult to know how big an impact it will make," said Gregory Klump, chief economist with the Canadian Real Estate Association.

Some industry experts see a knock-on effect in other parts of the housing market.

"If more people are chasing lower-priced homes, more of them will be unable to find something that meets their needs and for which they can get financing," said Will Dunning, chief economist for Mortgage Professionals Canada.

Home buyers in the most expensive markets worry they will never be able to own a house.

Gulzar Ali, a 42-year-old IT specialist, has been trying to buy a house in Toronto for three years. It took him two years to save for a 10-per-cent down payment on a $500,000 house. But now the same place is valued at $750,000.

"My income is almost the same for the past three years. But house prices have increased," he said. "If the new rules bring the price down, then I might qualify."

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About the Author
Economics Reporter

Rachelle Younglai is The Globe and Mail's economics reporter. More

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