Kick It While It’s Down – Housing that is

What would a week be in brokering if we didn’t have curve balls thrown at us on the regular?

Today OFSI announced they will implement the 450% income test to mortgages starting 2025. Basically, the mortgage amount cannot exceed 4.5 x the borrowers income.

Of course, the Big 5 will get some exceptions, but they will be capped as to how many loans over the 450% income threshold they can provide each quarter. The cap will be based on the number of loans written in the quarter – not the amount of loans funded. This means that funding massive super sized jumbo mansion loans won’t give more wiggle room.

Now, mortgage loans that were more than 450% of income were around 12% in q4 of 2023 ( last quarter we had info for ), but that was a drop from 26% before interest rates started rising in early 2022. However, this means that roughly 1 in 10 potential clients will now be off limits to us, as they fall outside of the ratios.

So, let’s do a little math here, shall we? Now, averages are always just, well, average, but it gives us a bit of a glimpse in our futures. In the fall of 2023, the average Canadians pay was $61,080.00 per year. Let’s assume we have 2 workers in the house. That means the household income is around $122,160.00. Put a 4.5 x multiplier on that, and you get a qualification of $549,720.00.

Now, as of January 2023, the average house price coast to coast ( depending on what stat you take, but let’s go in the middle ) was $678,900.00. So, that means that in order for the average Canadian to qualify for the average house in the average market, said average Canadian couple would need a down payment of $129,180.00 plus closing costs of 2% for a total of $142,758.00.

Now, that is a lot of money to have for a down payment. Ironically enough, this amount equates to around 20% of the purchase price, which magically means that CMHC may not be required to insure the Big 5 bank mortgages. I am sure it is just pure coincidence the way those numbers worked out. After the announcement this week that the federal government is buying CMB bonds and trying to take all of CMHC’s debt onto the federal books, it looks like the bank regulator is now trying to de risk the mortgage books of CMHC. It’s funny how the left hand helps the right hand out. For god sakes at least space the announcements out a little bit so it doesn’t look like insider trading.

So for 2024 we have immigration targets being dropped, we are seeing a lot of emigration ( new Canadians moving back to their previous country due to the high cost of living in Canada ) and now we have limits that will drop qualified buyers by around 10% . I say 10% because the current numbers of buyers over the 450% ratio is around 12.5%, but I assume banks will wiggle about 2.5% of those into the exception bucket. Perhaps, and I hate to pontificate here, but just maybe the housing goes up, rocket ship emoji, buy now crowd might want to re-think their predictions. I am not here to say that housing is a dead horse, but the bull market case for housing going up is certainly likely to be challenged.

This is the exact type of scenario I speak of regularly – government regulators cannot look out of their own way. The time to implement this was about 30 months ago – not now. The time to de risk the books was when prices were flying high, and people owned multiple properties. Every time the government steps in to the market with new rules, new regulations, and new guidelines it destabilizes the market, and makes people nervous. Every time there is late Friday night changes announced, people get spooked, and wonder what is next.

While I am all for something that should help bring down the cost of housing – and I think this will help stabilize it, the delivery was less than stellar. I would say a 7.3 on the technical merit, and probably about a 2.0 on the artistic presentation. Long term this is good for our industry as it serves to protect our future clients being able to afford housing. It ensures we will have clients over the coming 20 years. It stings right now, and it will take some adjusting to let the market find its level here, but sometimes what hurts now, helps later.

And yes, I know the Tik Tok videos will be going wild over the next 48 hours with all of the realtors screaming ” buy now before you don’t qualify”, and I am sure that will force a slight bump up in sales temporarily. However, I would like to think that people have learned a lot in the last 2 years or so, and will think through the home buying life cycle. Prior to 2022, people would rush in to buy, because they were certain they could flip it to someone else tomorrow for a higher price. Now though, people may not be as willing to overbid on a home, if they know that the person they need to sell it to eventually will have to qualify at these new rules.

Of course, none of this means shit if the overlords that police the industry can’t find a way to stop the rampant mortgage fraud that goes on day in and day out. The fraudsters will simply make the LOE’s and T4 slips show more income. The government made 2 big announcements this week involving housing – and not one was aimed at solving the largest problem we have in our industry. They had a great opportunity, and the blew it. I can’t say as I am shocked, as I have a very low bar of expectations from anyone in government these days, but I was in some ways hopeful. But, as usual, the government has made sure that they will be looked after by reducing risk on their books, and profiting a little bit from arbitraging out the difference between CMB rates and government bond rates.

Mortgage on!!