WHAT CAN THE GOVERNMENT DO TO COOL DOWN A RED-HOT REAL ESTATE MARKET?

by | Apr 11, 2021 | Real Estate

There’s no other way to put it: the pandemic has transformed the luxury real estate market. This is outlined in Sotheby’s new Top Tier spring luxury market.

Related: Looking to get creative with mortgage financing to buy a luxury home? The details might surprise you

Residential real estate sales over $4 million are seeing a lot more activity in the Greater Toronto Area (GTA). Home Sales spiked 157 percent compared to last year in the first two months of 2021.Five ultra-luxury properties (priced over $10 million) also changed hands, compared to just one in the same time period in 2020. This is just a small sampling of all the activity in the luxury space.

All of this activity has the government considering changes to cool the real estate market. Here are some changes that might be introduced in the coming months that could impact the luxury real estate market.

An iconic castle listed at $9.75M by Corinne Poffenroth, one of Calgary’s highest priced listings.

Stricter mortgage stress test

This is actually already in the works. The Office of the Superintendent of Financial Institutions (OSFI) has announced plans to hike the qualifying rate used for the mortgage stress test from its current 4.79 percent to 5.25 percent. The changes are supposed to come into effect June 1st.

If you’re a luxury homebuyer paying for a home in cash, this won’t affect you. However, if you’ll be taking out a mortgage for the purchase of luxury real estate this may affect you.

When we sat down and crunched the numbers it reduces the average homebuyer’s purchasing power by about four percent. While four percent certainly isn’t zero, it’s hard to see how this will have much of an impact on the real estate market.

If you’re a luxury real estate buyer, it will just mean that you may need to put slightly more down on a property if you’re buying a home after June 1st.

A palatial, opulent bungalow in Markham, listed at $6,888,000 by Paul Maranger and Christian Vermast.

Lower debt service ratios

Debt ratios are a way for mortgage lenders to measure how much of your income is needed to go towards the expenses of a property; mainly mortgage payments (at the stress test rate), property taxes and condo fees (if applicable).

If you’re a well-qualified borrower, currently you can go up to a maximum of 39 percent for the gross debt service (GDS) ratio and 44 percent for the total debt service (TDS) ratio.

OSFI has already indicated plans to increase the mortgage stress test rate. Could it lower the maximum debt service ratios? This would certainly make an impact. The Canada Mortgage and Housing Corporation (CHMC) reduced the maximum debt service ratios a while back on insured mortgages. Could we see a similar move for those putting more than 20 percent down? Only time will tell.

This penthouse listed at $12.9M by Liza Kaufman, The Kaufman Group, sold in January at the highest condo price in Quebec’s history on MLS.

Tighter rules surrounding rental properties

If you’re a luxury real estate investor with a portfolio of rental properties, you’ll want to keep a close eye on the mortgage rules. With a lack of housing supply, the government will look for quick fixes. One of those is making it tougher to purchase rental properties.

Currently real estate investors can use the equity of existing homes to buy rental properties. This is how real estate investors are able to build their portfolio super quick. However, could the government disallow borrowed down payments for the purchase of rental properties? This remains a distinct possibility and could help slow down the growth of the real estate market to ensure housing remains affordable for everyone.

Ron Thom masterpiece, listed at $21.5M and sold in March by Monique Badun, Kim Craig, Vito Longo.

The bottom line

These are just some of the possible changes. This is an evolving situation. We’ll let you know if and when new mortgage rules are introduced.

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