HOMEFINDER: Home purchasing power reduced through new policy

New mortgage qualifications will hit first time homebuyers the hardest

First time homebuyers flocking to the West Shore will face a dramatic reduction to the amount they can borrow as a result of the federal government’s move to tighten mortgage qualifications later this month.

“It’s going to make a huge difference,” said Cheryl Johns, a West Shore broker with the Dominion Lending Centres Modern Mortgage Group Corp. “There’s nothing we can do about it.”

Effective Oct. 17, buyers with less than a 20 per cent down payment – most first-time buyers – will need enough income to qualify at a higher benchmark interest rate posted by the Bank of Canada, even though their actual payments are based on the lower retail rates lending institutions offer.

“It’s called a stress test,” Johns said, adding it’s a way to make sure homebuyers can weather an increase in interest rates.

Right now the gap between the two rates is around two per cent, so the rule is equivalent to a sudden interest rate spike of that amount for many buyers.

“It’s going to have a dramatic impact on affordability for millennials,” said Cameron Muir, B.C. Real Estate Association chief economist. “As much as 20 per cent of their purchasing power has been eliminated. Many of them will be squeezed completely out of the marketplace.”

Muir said a couple with combined annual income of $80,000 and a five per cent down payment can currently buy a home priced at about $500,000. “That’s going to fall to about $400,000. That’s a $100,000 reduction in their purchasing power. That’s a substantial hit to affordability.”

Johns noted a lot of first time buyers will now have to wait until home prices start to decline a bit, ask their parents for help with the downpayment, or wait and save up on their own.

It’s the sharpest government-imposed cut to what new home buyers can afford in years, Muir said, predicting millennials will bear the brunt.

“Unlike previous generations, their purchasing power has now been reduced through government policy.”

Johns added that unlike previous moves to tighten mortgage qualifications, this one “came extremely quickly.” In fact, it was announced two weeks ahead of that Oct. 17 date, with a long weekend included in the mix, Johns said. “Everyone’s busy, we’re working hard.”

Federal Finance Minister Bill Morneau unveiled the change as one of a series of measures to reduce risk in overheated housing markets.

Muir argued the mortgage qualification rule could have been phased in gradually. “The shock over a number of years wouldn’t be the same shock we’re now going to see in the markets.”

He said the change threatens to have broader impacts, potentially triggering a drop in home construction activity, associated jobs and economic growth.

Helmut Pastrick, chief economist for Central 1 Credit Union, said he expects some drop in sales to first time home buyers as a result.

Unlike the foreign buyer tax B.C. has imposed only in Metro Vancouver, Pastrick said the federal mortgage qualification change is “indiscriminate” and applies everywhere, even where overheated real estate has not been a problem.

“It will ripple out beyond the first-time home buyer market,” Pastrick said, adding existing owners seeking to sell or downsize are often dependent on a first-time buyer purchasing their home.

Pastrick is in the process of scaling down Central 1’s forecasts for real estate market and B.C. economic growth for 2017 as a result of the mortgage rule change. He expects a five per cent decline in benchmark home prices over the next six to nine months, coupled with lower sales.

But Pastrick predicts the real estate market will stabilize over time, not collapse.

“Markets will adjust –this is not the beginning of the end of the cycle,” he said, citing the strong trends of growth for B.C.’s economy, jobs and population.

Johns had a slightly more positive view of the future of the West Shore real-estate market. “People will always continue to buy homes … We’ll have to go through some growing pains but we’ll make it through,” she said adding, “It’s still a good time to buy, rates are still nice and low.”

For those that are still looking to buy, Johns said “make sure you contact your broker, or myself, and get your finances checked.” She also noted that having pre-approval in place before beginning your search is key.

– with files from Jeff Nagel


Q: How can first time buyers come up with a down payment?

While some first time homebuyers will have to shelve their dreams – at least for a little while – with new mortgage qualifications taking effect on Monday (Oct. 17), others will be forced to find creative ways to put more money into their downpayment.

Often first time buyers will turn to parents or grandparents to help give them that extra boost when trying to put together a downpayment.

Another popular choice is pulling money from a Registered Retirement Savings Plan. Through the Home Buyer’s Plan, you can borrow up to $25,000 from your RRSP to use as a down payment on your first home.

Cheryl Johns, a West Shore mortgage broker with the Dominion Lending Centres Modern Mortgage Group Corp. , noted even with new regulations, now is still a great time to buy for many wishing to jump into the market.

The West Shore also offers first time buyers some more affordable options that can ease some of the pressure.

Rates are also still relatively low, she added, and a mortgage broker will be able to give potential buyers a good idea of what their price range is.


» 244/734 — NET UNCONDITIONAL SALES / TOTAL, October 2015

» 301/925 — NEW LISTINGS / TOTAL, October 2015

» 1,995/3,170 — ACTIVE RESIDENTIAL LISTINGS / TOTAL, October 2015