Based on Toronto Real Estate Board's August 2016 market report, detached and semi-detached houses average price increased by 18.3% and 16.4% year over year.
With no end in sight to the double digit increases, here are 4 reasons why the government will have to step in to cool off Toronto's real estate market:
- Canadian Dollar: Ever since oil prices collapsed the Canadian dollar is no longer at par and is 30% "cheaper" than it was. For all the foreign buyers, their purchasing power increased by 30%!
- Places to Grow Act limits urban sprawl and encourages intensification. With approximately 100,000 immigrants ending up in the GTA and limited land supply to build on, prices will appreciate (average detached and semi-detached house prices in the 905 increased by 23.3% and 20.6% year over year for the month of August per TREB's report)
- Lack of Supply: There just is not enough inventory in the market. Eg. For C03 (Humewood-Cedervale, Oakwood Village and Forest Hill), there were 24 detached and 3 semi-detached houses sold in the month of August! This shortage and buyers' frustration is a main contributor to pre-emptive (bully offers) where buyers are not waiting for the offer presentation date
- Low Interest Rates: In my opinion, this is a minor factor influencing the market and here's why: In 2007/2008 buyers were able to qualify for 40 year amortization which has been lowered to 25 years for less than 20% downpayment.
Mortgage Interest Rate Amortization Monthly Payment
$300,000 4.49% 40 yrs $1338.79
$300,000 2.39% 25 yrs $1327.52 ($11.27 savings)
A few possibilities to cool off the market are:
- Having all mortgage applicants regardless of product or term qualify at the posted rate and not contract rate. Currently all variable mortgages and fixed terms less than 5 years qualify at MQR (mortgage qualifying rate) which at time of writing is 4.74%. For 5 year fixed terms, applicants qualify at contract rate (2.44% vs 4.74%) which increases the purchasing power. I believe if this change is implemented, first time home buyers will be most negatively affected since they are the ones who are closer to maximum allowed debt service ratios. The problem in Toronto is not the first time home buyer segment, it is the move up buyers looking for larger spaces as their family needs change
- Reduced amortization to 25 years across the board for all mortgages and not just less than 20% downpayment
- Additional taxes for foreign buyers similar to British Columbia specific to Toronto and/or GTA
- Increased downpayment requirement for higher valued homes. Current requirement is:
Purchase Price Downpayment Requirement
$501,000 - $1,000,000 5% on the first $500k, then 10% on the balance
$1,000,000+ 20% minimum, additional downpayment based on sliding scale)
The above measures would affect all of Canada's real estate market and not just Toronto with the exception of additional taxes which are specific to Toronto/GTA.