Justin and Jenny’s Real Estate Update October 2017

Sales rise from September, but will new OSFI rules dampen the market?

Home sales continued to show some signs of recovery in October with sales volumes up 11.6% from September. This is not that unusual, as volumes typically rise in October but the increase was higher than normally expected. Some of this may be the result of pent-up demand following an extremely weak summer, as well as house hunters beginning to see bargains and reacting as such. As expected the 416 area codes displayed stronger activity with Toronto sales up 14.9% from September, while York Region increasing 13.6% and Durham region up only 1.2%. Interestingly, activity for single family detached homes in Toronto was reasonably active (relative to the past several months) with sales rising 26.5% from September. While encouraging, volumes remain well below last year. Looking ahead, some observers expect a bit of a surge in activity before year end, as buyers look to lock in deals before new mortgage stress tests come into effect on Jan. 1. More on this on page 3.

Average transaction prices for single family detached homes were down 5% from September and 1% from last year. Overall, the average price for a detached homes in Toronto was $1.288 mm, while the average for condos was $555k. These are 18% and 4% below April’s peak, respectively.

Higher end of the market has slowed more dramatically

We dug deeper into the data and looked at transactions by price point, and not surprisingly confirmed that the higher end of the market has been considerably weaker. Homes with price points above $1.5 mm were down 39% from last year, compared to a decrease of 27% for the overall market. The luxury end of the market in Toronto had been booming for a number of years growing almost 400% since 2014, before slowing substantially in May. At one point during the spring, homes over $1.5 mm represented nearly 12% of all transactions – this compares to a more normalized level of between 3% and 4% (2013 -2016). The foreign tax and other rule changes likely had some effect, but we also believe tighter lending requirements, stress tests, etc. also have had an impact.

Summary of Activity – Detached Houses Remain Weak Overall

Summary of Activity – Condo Market Remains Healthy

What impact will increased stress tests have on the market?

OSFI (The Office of the Superintendent of Financial Institutions) which is the regulator that oversees the Canadian banking system announced that it will extend its stress tests beyond insured mortgages to all mortgages. Recall, last year, OSFI implemented its mortgage stress tests to insured or high ratio mortgages where the loan to value is 80% or greater. Under those rules, anyone putting a down payment of 20% or less would need to qualify at significantly higher interest rates (at the BoC’s 5 year posted rate or 200 basis points above existing mortgage rates, whichever is higher). This effectively reduced the purchasing power of borrowers in that category, and primarily impacted first time home buyers.

The new OSFI guidelines (known as B-20) which go into effect Jan.1, 2018 will apply to uninsured or low ratio mortgages- that is for mortgages where the down payment is greater than 20%. Essentially, the new rules will reduce borrowing power by between 18 and 20%. However, there may be options for borrowers including extending amortization periods beyond 25 years to upwards of 35 years, which B-20 does not address. Whether or not lenders will adjust their lending policies to allow for higher amortization periods is still unknown. In addition, provincially regulated lenders such as credit unions are not subject to OSFI rules and may be an option for some. Nonetheless, the majority of borrowers should expect reduced borrowing capacity come next year.

Our indications from mortgage broker contacts suggest that borrowers that make binding purchases dated and signed before Jan. 1, 2018 will qualify under the old rules irrespective of the closing date. Naturally, any purchases made next year will be under the new OSFI guidelines. For those looking to make a purchase in the near term, we highly recommend speaking with a mortgage broker or your lender to see how these rules will affect you.

We expect this will have an impact on the market, particularly for higher end homes, although it probably doesn’t impact ultra luxury markets, as buyers in that segment are unlikely to be impacted. We also anticipate the sub $1.0 mm market to be more competitive, as the pool of buyers increase. Buyers previously with a $1.2 mm budget are now looking below $1 mm and competing against first time home buyers, move-up buyers, downsizers and investors. This could have the effect of tightening up that segment of the market, which currently is predominantly condos.

The market will eventually adjust to the new rules, as it always does, and we expect fundamental factors that impact the supply and demand of real estate (such as land availability, employment growth, population growth, infrastructure and transit) will once again be the main drivers of the market.

Our full report provides our updated views and analysis of many specific neighbourhoods in Toronto (i.e. Downtown West, Lawrence Park, Forest Hill, Leaside, Mount Pleasant, York Mills, Bayview Village, Willowdale, the Beaches, etc.), as well as Richmond Hill and Pickering. View our report here.

Feel free to contact us, we are always happy to help!

Kindest Regards,

Jenny & Justin Wu
Sales Representatives
RE/MAX Hallmark Realty Ltd.