Tax and mortgage rule changes may cool Vancouver housing market
Federal Government Changes to Mortgage Insurance Rules
Susan Lazaruk
The Province
Ottawa’s tightening of a tax loophole for housing speculators and new rules to make getting a mortgage tougher for first-time homebuyers may cool Vancouver’s overheated real estate market, according to industry watchers.
Federal finance minister Bill Morneau announced the changes Monday that would target foreign buyers and over-leveraged Canadians and appear designed to slow down a frenzied real estate market in Vancouver and Toronto.
“Across the country, many middle-class families looking to buy their first home see prices climbing, often out of their reach,” Morneau said. “Some are taking on high levels of debt in a rush to buy before it’s too late.”
And he referred to a tax loophole that allowed buyers who declare properties as their principal residence, when they’re not, to avoid paying capital gains tax on any profit when they sell.
“If it captures speculators who were using that tax rule inappropriately, that’s what we were hoping to do,” Morneau told Postmedia News.
Under the new rules, buyers of properties that are not their primary residence will no longer be able to claim that income tax exemption, and families will only be able to designate “one property as the family’s principal residence for any given year.”
In the other change, as of Oct. 17, “mortgage stress tests” that used to apply only to buyers with down payments of less than 20 per cent who took out mortgages with non-fixed rates under five years will apply to all first-time borrowers.
The change means that even if buyers can secure a mortgage for the going rate of under three per cent, they will have to base their financing on the higher Bank of Canada posted rate of 4.6 per cent, designed to prevent mortgage failures if interest rates should rise.
On a $550,000 mortgage, that means proving to the bank the buyer could afford an extra $400 a month in mortgage payments.
According to Helmut Pastrick, chief economist at Central 1 Credit Union, closing the tax loophole, which would cost speculators at least 10 per cent of their profits, could soften the Vancouver real estate market, already dampened by a 15 per cent foreign buyers tax levied by B.C. on Aug. 2.
Vancouver city council also said recently it will impose a vacant property tax of as much as two per cent of a property’s value next year on any homes that aren’t lived in or rented out.
“It (closing the capital gains loophole) will scare some foreign buyers, at least temporarily,” said Pastrick. “This is meant to cool the market in Toronto and Vancouver and it will succeed in some regards.”
He said “property flippers” shouldn’t be allowed to evade taxes and the closing of the loophole should have been done long ago.
“There should have been greater oversight from the beginning,” said Pastrick.
But he predicted the change would not have a long-term effect on rising housing prices in B.C., because multimillionaires wouldn’t be deterred by the extra tax.
Because of growth in the local population and economy, “the supply/demand imbalance will continue. This will not be sufficient to create a cycle downturn and it won’t cause a price correction.”
The tightening of mortgage rules will have a greater impact on cooling sales because it will make it more difficult for new homebuyers to qualify for a mortgage.
“They will have to have a larger down payment or settle for a home of a lower value,” he said.
Pastrick predicted a “flurry of activity” leading up to Oct. 17 when the rules change and then a “drop off.”
“First-time buyers are the fuel for the market,” said realtor Adil Dinani.
He said his business won’t be as affected by the closing of the tax loophole and noted the high end of the market has been cooling lately, likely because of the new provincial foreign buyers tax.
But he said the entry-level condo market is still active and he was involved in three sales of properties under $350,000 last week.
Tom Davidoff, a professor with UBC’s School of Population and Public Health, said the mortgage change will have a higher impact on the market than the closing of the loophole.
He said it is the government’s role to curtail buyers from over leveraging on mortgages when it’s the government that’s insuring those mortgages, and he said a similar measure in the U.S. would have prevented the issuing of subprime mortgages that triggered the global meltdown in 2008.
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