More upheaval in the housing market!
We expected the Covid19 economic shut-down would affect the housing market; we just didn’t know exactly how and exactly when.
The first effect was that everyone backed off on their buying or selling plans. The Greater Vancouver market saw its lowest April sales totals since 1982. But prices remained stable because the balance remained between buyers and sellers.
Elsewhere in the country, things were not so stable, with prices dropping dramatically in some parts, particularly in the Toronto area.
With the gradual opening up of the economy; with interest rates having dropped a little; with some consumers suddenly realizing they have excess cash they’re not going to spend on those overseas trips they’d planned for this summer; and with the high point of the annual real estate cycle (March) having been pushed back, resulting in latent demand and antsy home shoppers, the market has gotten hot in this area again.
Shopping for a property in Mission last week became very difficult as the hot local market meant properties were snatched up as soon as they went onto the market and bidding wars ensued. (One house, listed for $529,000, sold for $560,000.)
None of that is too surprising.
But in the middle of this, CMHC drops a bomb shell. Despite its prediction that housing prices will fall between 9 and 18%, CMHC is worried (again) that home-buyers will get themselves into trouble due to the economic uncertainties caused by Covid19.
So, last Thursday, it announced it is toughening mortgage lending rules, to take effect July 1
What are these changes, and how will this affect home buyers and potential rent 2 own clients?
1. One change to the CMHC rules is that they are raising the minimum score to be eligible for a 10% down mortgage from 600 to 680. This should not affect rent 2 own clients. Practically, 680 always was the minimum threshold to be approved for a 10% down mortgage, even if, officially, it was lower. It would have had to be an exceptional circumstance for anyone to have gotten a mortgage with a score lower than that. They’ve removed these exceptions. In our program, we always aim for 700 anyways, to reduce the risk factor.
2. CMHC has also tightened the rules for eligible down payment sources. They are eliminating any source that will increase indebtedness, meaning that you cannot borrow funds for a down payment. This was already, with very few exceptions, being practiced by lenders. It is those few exceptions that are being eliminated. This also should not affect rent 2 own clients.
3. CMHC is lowering the level of indebtedness that they will allow mortgage holders to carry. Previously, your gross debt service (GDS), meaning your monthly housing costs—mortgage principal and interest, taxes and an amount for utilities—could not exceed 39% of your gross monthly income. But that 39% limit was only if your credit score was very good; otherwise, it was 35%. Now the 39% ceiling has been eliminated, and the 35%, as I understand it, applies to everyone.
Additionally, there was a ceiling on total debt service ratios (TDS), meaning your GDS plus all other debt payments combined (like vehicle loans, student loans, credit card debt, etc.) could not exceed 44% of your gross monthly income. So you were allowed 5% for other debt payments, besides your housing debt; if your other debt payments were more than 5% of your gross monthly income, it lowered the amount left for housing payments. Now that ratio has been lowered to 42%. This will affect home buyers and rent 2 own clients because it will lower the amount of mortgage they qualify for and thus the maximum value of the property they can purchase.
For rent 2 own clients, we had already stayed a little on the conservative side of this limit when qualifying our clients. Because of this, likely none of our current clients will be in any difficulty. However, we may need to reduce, just a little, the property value limits for new clients enrolling in our program.
Things continue to be uncertain and volatile. While CMHC’s predicted price drop is certainly not happening in our area, at least not yet, this may be very localized, with some places remaining relatively stable, some very hot, and some declining. And the variation depends upon the nature of the property, as well.
Stay tuned. Without summer fairs happening this year, the housing market might be the only roller-coaster ride we get this summer.
