Could Canada's new mortgage rules drive up home prices?

The federal government’s recent move to hike the insured mortgage cap was an effort to open the door to homeownership to more Canadians – but it’s also one that some believe could have the unintended effect of driving up house prices.

Finance minister Chrystia Freeland announced last month that the government was increasing the insured mortgage qualification cutoff to $1.5 million, a change that raises the maximum price at which Canadians can buy a home with a downpayment of less than 20%.

The government described that as part of the boldest mortgage reforms seen in generations, but some observers have highlighted the prospect of upward pressure on home prices and increased competition as a result.

In Barrie, Ontario, mortgage broker Nick L’Ecuyer, of Mortgage Wellness, told Canadian Mortgage Professional he expected that trend to emerge after the rule change takes effect in mid-December. “What’s really interesting about this is that Barrie is an area that has tons of pockets of homes that are very specifically tied to this rule right now,” he said.

“There are probably four or five communities that I can think of where the homes are all sitting there at $999,999 because the realtors and the sellers know that if they price it at $1 million [or above], they lose half their audience. Nobody with less than 20% down can buy that home.”

That’s set to change thanks to the new upper limit. “I expect to see [price] appreciation after December 15 of all those homes in those areas specifically as a result of this rule,” he said. “It’s funny because it’s inflationary. It’s like ‘Hey, the price of the house just went up because more people can buy it.’”

The current limit means specific strategies are at play in the Barrie market. Conversations with real estate agent partners, L’Ecuyer said, reveal a common trend of buyers offering $999,999 even for homes valued slightly above that. “The agent will say, ‘Take it or leave it. My client doesn’t have 20% down. That’s his max price,’” he said. “‘It’s a government law – educate yourself and let me know if you’d like to take the offer that’s $200,000 less than listing.’”

Will the rule changes bring a flood of new buyers to market?

The eyewatering amount required for a downpayment across Canada’s priciest cities and the steep monthly costs of servicing a mortgage are frequently cited as two of the biggest barriers to homeownership for hopeful buyers, especially those purchasing for the first time.

In addition to upping the insured mortgage cap, the government also expanded access to 30-year amortization periods, meaning first-time buyers and any Canadian buying a newly built property can choose a longer repayment period than the previous maximum of 25 years.

While that may be a gamechanger for some buyers, the impact of the insured mortgage cap is unlikely to be huge, according to L’Ecuyer. “There’s not going to be anybody running to the market to buy a $1.5 million home with a minimum down payment,” he said.

“To qualify for that mortgage, you have to make $300,000 in household income, have no debt – and if you qualify, your monthly mortgage payment is $7,500 plus property taxes. Think about how it’s going to affect the market. Who buys a $1.5 million home with less than 20% down anyway?”

Activity showing early signs of heating up: economist

Steep mortgage costs and high home prices have weighed down Canada’s housing market since 2022, when the Bank of Canada began bumping interest rates in response to soaring inflation.

But three consecutive rate cuts since the beginning of the summer are slowly changing buyers’ outlook when it comes to purchasing a home.

Those lower rates “got the wheels turning a little faster” in the national housing market last month, Royal Bank of Canada (RBC) assistant chief economist Robert Hogue wrote in a recent report, as sales activity began to heat up – and that’s only likely to intensify in the months ahead. “Our view is that sales will continue to pick up as the Bank of Canada cuts rates further,” he said, “especially as the size of those cuts [is] expected to get larger.”

Source CMP
By Fergal McAlinden