The federal government is officially looking to toughen financing requirements for real estate investors.

Through the Canada Mortgage and Housing Corporation, the federal government intends to review down payment structures to drive speculators and investors out of the market, whom they appear to blame for the appreciation prices fast.

According to the founder of Butler Mortgage, it was about time and he thinks it will happen. Monumental gains in home equity have persuaded buyers in the market to not sell the homes they live in and instead finance their new purchases using the equity in existing homes.

“They’re going to do something to stop people from buying or keeping rental properties,” Ron Butler assumed. “It used to be that you would sell the condo you were in and use the proceeds for a down payment on a bigger townhouse, and the world would work, but for the past 18 months that hasn’t happened. People think they can’t sell their condo now because its value keeps going up, so they just extract money from the condo because its value will go up forever, and buy that townhouse with borrowed money. They refinance their current homes and proceed to purchase other properties.

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Butler added that the same formula is prevalent in major city single-family home markets.

“People say they want to keep their house and move on to something bigger. This is a new phenomenon and the government thinks it should try to discourage people from buying investment property using a borrowed down payment, that is, a line of credit on a house for a 20% down payment on a rental property. There is no cash; they don’t buy with durable assets. These assets are 100% financed.”

Will investor disincentives ease the supply crisis?

Hording properties could explain why real estate boards across Canada have reported significant supply shortages in the resale market throughout 2021. Butler says there is a dire need to rein in rapid home price appreciation in Canada and suggests ways to achieve this through mortgage qualification. One way is to make home equity lines of credit harder to obtain for the purpose of buying another property.

“The other idea is to increase the down payment for a property that is not owner-occupied,” he said. “If we increase that down payment from 20% to 25% or 30% for a property you don’t live in, when you go to a banker they will tell you those are the rules.”

In an emailed statement to STOREYS, CMHC referenced its real estate equity action plan, part of which reads:

“By developing policies to limit excessive profits in investment properties, protecting small independent owners and Canadian families, and by examining down payment requirements for investment properties, we target the issues facing the market from several angles.

“We also understand that the most effective way to reduce price pressure and affordability is to increase housing availability. And with a strong mandate to help boost housing supply, we will give more Canadians a place to call home. The minister will host a national housing supply summit in the coming weeks with partners and leaders, to ensure we have all voices at the table.

Government intervention a game of “Whac-a-Mole”

However, independent housing analyst Will Dunning is wary of yet more government interventions that he believes are invariably wasted, likening each of its forays into the housing market to a game of “Whac-a-Mole”. The government has so far provided few details on how it intends to proceed, but it says that whenever a heat source emerges in the housing market, the government’s attempts to mitigate it create heat sources elsewhere – in this case it would be the rental market.

In Toronto, one-bedroom rentals average $1,850 due to high demand and low supply. Dunning thinks such high rates explain the importance of investors in the housing ecosystem.

“The government has been tinkering with the housing market for 13 years, and that’s part of the reason why we don’t have enough housing in Canada, so maybe they should pay more attention to that in the future. future and maybe roll back some of the restrictions they have put in place, like mortgage stress,” Dunning said of B-20, which is testing mortgages at a floor rate of 5.25%, versus 4.79% in the first half of 2021, or applying 2% – whichever is greater.

“No one should expect us to have as high an interest rate as people are looking for.

“By making it harder to buy a home, it means fewer people go into ownership and more people go into renting. Now, instead of suppressing home buying, they’re suppressing rental activity, and again that won’t work because they’re playing the wrong game, playing Whac-a-Mole with the housing market .

Of speculators like assignment flippers, who play a big role in rapidly appreciating real estate prices, Dunning says they can be dealt with easily by taxing their profits as regular income. But he also says speculators are ensuring the appetite for housing remains strong, prompting developers to keep building.

“You’re not going to find many buyers who plan to move into a condo four years from now; this part of the market depends on people with short-term horizons,” he said. “From this point of view, this must be tolerated because it contributes to the future supply of housing. If we had no buyers in the new pre-construction market, we would have even less housing supply than we have, so in this area you have to be careful. Speculators play a useful role in the housing system, although it doesn’t make us very comfortable knowing what’s going on.

Butler says he’s not “anti-investor” because they provide rental stock, but when people drive up the prices of those homes, the market becomes irrational and ends up hurting renters.

“People who have had a massive increase in their equity have access to more and easier loans because by using the value of their existing property they can effectively use 100% financing, but if you’re someone trying to save for a down payment, you don’t exist in that category, so you’re disabled. It’s trying to alleviate the disability,” he said.

Theoretically, many investors could be driven to sell their surplus properties, which would trickle down the housing ladder, Butler says, and help more renters become homeowners. But there is something else crucial at play here.

“Four of the top five bank CEOs discuss accelerating real estate prices in major Canadian markets and how it needs to stop,” Butler said. “They factor it in with inflation, but really what they’re saying is, ‘We can’t have this continuous increase in house prices. It is dangerous for our country. It comes down to our government saying, ‘If these guys are worried, we should be worried.'”

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