More CMHC rule changes July 1st — bad news for buyers

So, CMHC is once again making it harder for buyers to borrow money. My guess is that this is due to fear of buyers not being able to manage debt because of the pandemic, but it strikes me as a very dumb move. It will offset the economic stimulus packages, because housing is an economic driver. The last thing the country needs as it tries to recover is an even  slower housing market.

National sales volumes are down dramatically. That’s because the number of listings are down, due to the pandemic. Making it harder for buyers will just slow things down further in expensive cities like Toronto. But regionally, in more affordable cities like Ottawa, it will have an opposite effect when it comes to lower priced homes, and make them more expensive. Here’s why.

In Ottawa, where the market has been super-heated due to low inventory, the new rules will force first time buyers to rent longer while they try to save up that 20% down payment. Rents will go up as the rental market tightens. For investors, the lower priced properties become cash flow positive because they can be rented at a profit. And remember, a lot of investors are foreign cash buyers. Meanwhile, buyers who need to buy will adjust their expectations and start to look more seriously at lower priced properties. All that activity at the lower end of the market drives up prices.

We’ve seen that in Ottawa over the past two years after CMHC tightened the mortgage stress test for a second time, applying stricter borrowing rules not just to first time buyers, but all buyers. Townhouses that were priced under $ 400K  have jumped to the high 400s and even over $ 500K this year, despite the pandemic. We are still seeing multiple offers in that price point. And a lot of smaller condos that were selling below $200K  have jumped to over $ 300K — again, with multiple offers.

Here is a précis of the new rules as set out in an email I got from Cathy Macdonald, an Ottawa mortgage broker:

As you have probably already heard, CMHC announced some changes that will be coming into effect on July 1st.  These changes apply only to CMHC insured mortgages at this point. The other two insurers have not indicated whether they will follow, and the new rules don’t apply to borrowers with 20% or more for a down payment.

CMHC is reducing the maximum debt ratios and increasing the minimum credit score requirement for borrowers with less than 20% down.  These changes are most likely to affect first time buyers, lower income earners, or self employed (where we use net income), the most since they are usually trying to maximize their purchasing power.

The debt ratio changes will impact the maximum mortgage/purchase price significantly.  For example, I’m currently working with buyers who are pre-approved for a purchase price up to $600,000 (with the minimum down payment).  Under CMHC’s new debt ratios, they would qualify for a purchase price up to $535,000.

Current pre-approval amounts are still in effect until the end of June, and if the other two insurers don’t change their rules, the pre-approvals will still be valid beyond that date, but purchasers should be prepared for lower pre-approval amounts after July 1st.   If all of the insurers follow CMHC, in order to qualify under the current rules, a purchaser would have to have an accepted offer on a property that has been submitted to the lender and insurer before the end of June.

Bottom line: if you are a seller, regardless of price point, the very best time to list in Ottawa is right now, while buyers can still borrow money under the old rules. If you own an expensive home, your pool of buyers is really going to take a hit. A drop from being able to afford $ 600K to $ 535K is a huge price reduction.

In order to qualify under the old rules, buyers need to have an accepted deal in place by June 30. (Conditions of offer like financing and home inspections can be fulfilled later from the looks of it, and still allow a buyer to take advantage of the old rules.)

So here are my thoughts on how to stick-handle this situation. If you are a buyer with more than 20% down payment in cash, and are looking for something over $ 600K, it’s probably best to wait until after July 1. The pool of buyers will be greatly diminished and the new rules won’t apply to you when it comes to getting financing.

But if you are a buyer looking for something priced more affordably, and you don’t have 20% down, there’s no good strategy.

After July 1, when it becomes harder to borrow, even more buyers will be flocking to those properties.  But if you try to buy now, you’re going to be competing with a lot of other buyers who are also going to be trying to beat the deadline.

Either way, expect multiple offers on lower priced properties. And that will drive up prices, making previously affordable homes  even less affordable than ever. I’m shaking my head.

 

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