CMHC to Target Down Payment Requirements for Real Estate Investors
The federal government is officially looking to toughen financing requirements for real estate investors.
Through the Canada Mortgage and Housing Corporation, the feds intend on reviewing down payment structures in a bid to remove speculators and investors, whom it appears they blame for rapid price appreciation, from the market.
According to the founder of Butler Mortgage, it’s about time—and he believes it’s going to happen. Monumental home equity gains have persuaded buyers in the market not to sell the homes they live in and instead finance their new purchases using existing home equity.
“They’re going to do something to prevent people from acquiring or retaining rental properties,” Ron Butler surmised. “It used to be that you sold the condo you’re in and used the proceeds towards a down payment on a bigger townhouse, and the world marched on, but for the last 18 months that hasn’t been the case. People think they can’t sell their condo now because it keeps going up in value, so they just extract money from the condo because its value will rise infinitely, and buy that townhouse with borrowed money. They’re refinancing their current homes and proceeding to buy more properties.”
Butler added that the exact same formula is rampant in major cities’ single-family detached markets.
“People are saying they want to keep their homes and go onto something bigger. It’s a new phenomenon and the government is thinking they should try to discourage people from buying investment properties using a down payment that’s borrowed money, in other words a line of credit on a house for a 20% down payment on a rental property. There’s no cash; they’re not buying with hard assets. These properties are 100% financed.”
Will De-Incentivizing Investors Relieve Supply Crunch?
Hording properties could explain why real estate boards across Canada reported major supply shortages on the resale market throughout 2021. Butler says it’s absolutely necessary to curtail rapid home price appreciation in Canada and suggests ways to do that through mortgage qualification. One way is to make home equity lines of credit more difficult to obtain for the purpose of buying another property—Butler thinks it should be outright proscribed or at least severely restricted, which would make non-owners prime lending candidates.
“The other idea is increasing the down payment for a property that’s not owner-occupied,” he said. “If we increase that 20% down payment to 25% or 30% for a property you’re not living in, when you go to a banker they will tell you those are the rules.”
In an emailed statement to STOREYS, CMHC referenced its Fairness in Real Estate Action Plan, part of which read:
“By developing policies to curb excessive profits in investment properties, protecting small independent landlords and Canadian families, and reviewing the down payment requirements for investment properties, we are targeting the issues the market is facing from multiple angles.
“We also understand the most effective way to reduce pressure on prices and affordability is to increase the availability of housing. And with a strong mandate to help stimulate housing supply, we will be providing more Canadians a place to call home. The Minister will be hosting 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 intervention that he believes it will invariably bungle, likening every one of its forays into the housing market as a game of ‘Whac-a-Mole.’ The government has heretofore provided scant details about how it intends to proceed, but he says every time a source of heat emerges in the housing market, the government’s attempts at dampening it create heat sources elsewhere—in this case it would be the rental market.
In Toronto, one-bedroom rentals run for an average of $1,850 as a result of fierce demand and low supply. Dunning believes such high rates elucidate the importance of investors in the housing ecosystem.
“The government has been tinkering in the housing market for going on 13 years, and it’s part of the reason we don’t have enough housing in Canada, so maybe they should be more careful of that in the future and maybe back off some of the restraints they put in place, like the mortgage stress,” Dunning said of B-20, which stress tests mortgages at a floor rate of 5.25%, up from 4.79% in the first half of 2021, or applying 2%—whichever is greater.
“Nobody should expect we’re going to have an interest rate as high as people are testing for.
“By making it harder for people to buy homes, that means fewer people move into homeownership and more people move into rentals. 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.”
Apropos speculators like assignment flippers, who play significant roles in rapid home price appreciation, Dunning says they can be dealt with easily by taxing their profits as regular income. But he also says that speculators ensure appetite for housing remains strong, which incentivizes developers to keep building.
“You’re not going to find a lot of buyers who intend to move into a condo in four years; that part of the market depends on people with short-term horizons,” he said. “From that point of view, you need to tolerate that because it contributes to future housing supply. If we didn’t have buyers in the new preconstruction marketplace, we would have even less housing supply than we have, so in that area you need to tread carefully. Speculators play a useful function in the housing system, even though it doesn’t make us very comfortable to know that’s going on.”
Butler says he’s not ‘anti-investor,’ because they provide rental stock, but when people bid up the prices of those homes, the market becomes irrational and ultimately afflicts renters.
“People who have enjoyed a massive rise in equity have access to more and easier lending because, using the value of their existing property, they can effectively use 100% finance, but if you’re somebody who’s trying to save for a down payment, you don’t exist in that category, so you’re handicapped. This is trying to alleviate the handicap,” he said.
Theoretically, many investors could be moved to sell their surplus properties, which would reverberate down the housing ladder, Butler says, and help more renters become homeowners. But there’s something else crucially at play here.
“Four out of the five biggest bank CEOs are discussing price acceleration in real estate in key Canadian markets and how it must stop,” Butler said. “They blend it into inflation, but in effect what they’re saying is, ‘We can’t have this continuous increase in housing prices. It’s dangerous for our country.’ This filters back to our government saying, ‘If these guys are worried, we should worry.’”