January 1st arrived and brought upon changes to mortgage qualification rules that everyone in the real estate industry has been discussing for months. Long story short, all buyers will be subject to a rule that reduces their purchasing power by approximately 20%. *To see an example of this, please see the end of this article*. For more information, please get in touch or speak with your mortgage advisor.
In practice, what does that look like?
With the average price of a 1 bedroom condo in the Greater Vancouver area rising and remaining above $500,000 since July 2017, buyers who were on the cusp of being able to afford a starter home will now have a significant setback. To find their way into the market, they'll have to consider an inferior property, a different location, or continue to save or wait for an income boost.
Now in theory, given that the entire population is subjected to these new rules and everyone's purchasing power has been reduced, it would be a fair assumption to say that prices should begin to fall.
However, considering the overall price points that the Greater Vancouver area has risen to over the past two and a half years (many properties well over the $1 million dollar mark), the more likely scenario will result in those who had the budget for more expensive property crowding into the starter home range. This could actually cause the sub-million dollar property bracket to have more competition and potentially place upward pressure on pricing for condos and townhouses.
If we're looking at detached houses on the other hand, it's no secret that this marketplace has shifted into a balance where buyers have more selection and have seen price reductions on occasion. Here, there are expectations of further price relief over the coming months.
What Will Early 2018 Bring?
Hesitation is the most likely feeling that the market will experience in the early going of the new year. The reason for this is twofold:
- A significant new rule is often followed by a period of waiting by many to see how their peers will react
- The winter months generally bring a slowdown to the market due to a longstanding belief that waiting to list in the Spring offers better results
If all of this holds true, what's the market hack?
If you're looking for a condo or townhouse, get searching. Once the majority of people have adjusted to the new rules, attached property should pick up steam and see similarly high levels of demand as the past few years. If upsizing is on the agenda, house shoppers may want to take their time to see if neighbourhoods continue to see inventory rise and prices decline.
Listing or buying in 2018? Feel free to email me at firstname.lastname@example.org for expert guidance and how to maximize your results.
Thanks for reading,
Stress Test Example
Here’s how the rules would play out for a family with $100,000 in annual income, according to numbers provided by Ratehub.ca, a mortgage rates and credit cards comparisons site.
Let’s consider a first scenario in which the family is offered a mortgage rate of 2.83 per cent, which is more than two percentage points below the current Bank of Canada five-year benchmark of 4.89 per cent.
If they were to apply for a mortgage today, with 20 per cent down payment, a five-year fixed mortgage, and a 25-year amortization period, they would be able to afford a home worth $726,939.
If they were to apply for a mortgage on or after Jan. 1, they would be able to afford only $570,970, with a 20 per cent down payment.