Monday Jan 08th, 2018



2017 Was a Bumpy Ride for Real Estate In Canada. Would 2018 Be a Smooth Sailing?

There are two strong headwinds when it comes to buying activity in 2018: Tighter mortgage lending rules and the threat of higher interest rates.

Because of tighter mortgage lending rules, buyers simply can’t afford to buy the same house as they would have in 2017. This could mean shaving anywhere from 5% to 25% off your maximum house-price budget—although consensus shows it will mean an 18% reduction in your maximum purchase price for one in six borrowers, who put down less than 20%.

One unintended consequence of this forced fiscal responsibility is that more buyers will end up competing for cheaper properties—possibly driving up the prices of condos and townhomes, properties previously considered more affordable.

This push for more affordable housing opportunities could be exasperated as potential buyers try to get into the market before mortgage rates rise. It’s expected that the Bank of Canada will continue with incremental increases to its overnight rate in 2018. While no one anticipates discounted mortgage rates to shoot up to 6%, the posted rates will hit this mark relatively quickly. The increase in mortgage rates will further erode a buyer’s possible house-buying budget, prompting more buyers to pull the trigger before being potentially locked out.

Based on all these factors, we shouldn’t be surprised by an active spring market, particularly in the condo and townhouse market segments.

As a buyer, you’d be wise to secure a mortgage pre-approval before shopping for a home. Don’t just do a quick, online calculation — talk to a mortgage broker. For those buyers struggling to get a loan, consider going through non-prime mortgage lenders. These alternative lenders specialize in buyers turned down by banks, as they allow for more non-traditional income and permit higher debt ratios (up to 50% total debt service ratio, versus the 42% guideline used by the banks). Another option is to increase the length of amortization on the mortgage, which lowers the debt service ratio used to qualify for the loan.

Just don’t expect to get all this help without paying for it. In the past, non-prime lenders have charged higher mortgage rates (to reflect the higher risk of the borrower). Going forward these non-prime lenders may opt to cut the rate but make up the lost revenue by tacking on a fee. The result: Higher risk buyers will end up paying more with fees for amortization periods longer than 25 years, as well as fees for holding less than 20% equity in the house and fees to get access to rates low enough to allow them to qualify for the mortgage.


For sellers across Canada, it’s time to reset expectations. Gone are the days when you could expect to sell your home in a week or less (for more money than your neighbour, who only sold a month ago). Buyers are struggling to afford what’s out there and the result is a rise in inventory and a drop in sales activity.

In the last few years, a potential buyer ended up having to compete against other interests, such as investors, speculators and foreign buyers. Those in the market to make money have been pulling out—waiting for more certainty. That means fewer buyers in the market and fewer sales. The drop in sales activity will prompt price corrections and eventually, the market should stabilize in balanced territory. The investors and speculators may come back, at this point, but until then sellers need to readjust their expectations. The upside is that even a 10% to 15% drop in prices won’t reset a home’s value to pre-2016 price levels.

To stay competitive, consider scrutinizing current sales data for your street and neighbourhood. Walk through all open houses in your community, to get an idea of what homes look like before they sold (you can still get this sold data from your real estate agent). Finally, discuss with your real estate agent competitive pricing strategies.

What does this mean for current homeowners?
If you already own a home it’s time to do a little jig just don’t spend too long celebrating because it’s not all smooth sailing for current homeowners in 2018.

The biggest hurdle will be mortgage renewal. According to Bank of Canada analysis, half of all current mortgages will “reset” in 2018. What does this mean? It means 47% of mortgage holders will need to renew their mortgages; by 2021 another 31% of mortgages will need to renew and another 22% of that.

This surge of renewals will mean that these homeowners will have to make some tough decisions: Renew with your current lender and skip the mortgage stress test or shop around for a better rate and be subjected to the mortgage stress test.

For those homeowners who were proactive about paying off their mortgage debt and building up the equity in their home, this decision will be easy. You will qualify for a great rate whether you stay with your current lender or shop around.

But homeowners who refinanced and added more debt to their mortgage loans, or those that weren’t proactive about building up the equity in their home, may feel the pinch. Those that choose to stay with their current lender may find the rates are not as competitive, but may not have options elsewhere, as they’ll be subject to the new mortgage stress test.

Homeowners looking to obtain a Home Equity Line of Credit (HELOC) may be surprised at how much smaller this revolving loan will be in 2018. In 2017, anyone applying for a HELOC was stress-tested using the posted 4.89%. As of January 1, 2018, this rate increased to 5.7% (and will continue to increase as rate rise).

It’s worse if you’re a homeowner looking to refinance. Those looking to consolidate their debt through a refinance in 2018, may be surprised by the less than attractive mortgage rates offered to them, or the inability to qualify for the loan amount needed. Typically, those that need to refinance have debt ratios that are above average and this will be very problematic when trying to qualify under the new mortgage rules.

What does this mean for investors?
If you’re still in the market to buy a rental property, hats off to you. Many real estate investors were scared away in 2017, partly because of the crazy spring market and partly because of market uncertainty due to regulatory changes. But with markets rebalancing and prices starting to level off of slowly come down, many investors may get back into the market.

While single-family detached homes are still golden gooses, it’s hard for small landlords and large institutional investors to earn a profit on this building type. The purchase price is often too high to make rental numbers work, unless you can secure more than one rental in the home and this comes with its own costs and headaches.

For those investors choosing to skip the single-family home and look at condos and townhomes, keep in mind that competition may increase in these segments quite substantially in 2018. More first-time buyers may be pushed into this pricing segment and this would mean even more competition for these units.

Old rules of thumb remain, however. Try to find units that are well capitalized (lower purchase price, higher rental yield) and, where possible, look for neighbourhoods that support renters, such as urban centres, university and hospital communities as well as commercial complexes that offer newly built retail and office space.

Any investor thinking of buying in 2018, should first start with a financial plan and a budget. Then talk to your accountant and mortgage broker to make sure the numbers work. If all this checks out and you’re lucky enough to find a property, then 2018 may be the year for you to become a landlord (and the real work begins).

Source: Money Sense…/canadian-real-estate-market-out…/

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