With the bank of Canada changing the mortgage rules on October 17th, 2016, it’s put a lot of fear into buyers and sellers. But how will it affect real estate investors? And will it at all?
How The NEW Canadian Mortgage Rules Will Affect Investors
Many buyers are thinking, “will I still be able to afford the house that I want?”
And sellers are not coincidentally thinking, “will there still be buyers to buy my house should I decide to sell thanks to these rule changes?”
I won’t go into much detail on all of the rule changes as there are many articles that focus on that already, but here’s the quick scoop.
The Scoop on Mortgage Rules…
The Bank of Canada has been desperately wanting to raise rates for a number of years, but it’s hands were tied. The economy still hasn’t fully recovered from the 2009 ‘recession’ so raising rates hasn’t been an option (there’s WAY MORE detail on why, but I’m not the guy to go into detail. Talk to an economist or analyst for that. What I do is is listen and talk to these (smarter) pros regularly so I can filter it down for us laymen to understand).
So what did the Bank of Canada do? The next best thing to ACTUALLY raising rates, is to force buyers to qualify at a higher rate, like a stress test.
From now on, anyone buying a home with less than a 19.99% down payment must FIRST qualify at a rate of 4.64% before ACTUALLY getting a much lower standard rate.
So you may be thinking, “so what, I’m an investor. I have to put minimum of 20% down when buying a property. How will these mortgage rules affect me?”
Here’s how it will affect us.
Because of this ‘stress test,’ it’s going to knock out some first time buyers from getting into the market. Like … A LOT!
Now here in Kitchener/Waterloo and Cambridge (and in many other cities across Canada), the ‘group’ that was forcing prices and demand for homes the most were first time buyers.
With these rates being SO low, almost anyone could qualify for a home. As long as you had a good steady full time job, 5% down and a decent credit score, you could buy an entry level home in most cities across Canada (you know, the type of single family homes most investor’s buy).
It was WAY too easy, and this was the number one reason for skyrocketing appreciation rates in the past year. There were just TOO MANY buyers and not enough sellers to fill the demand, so people were getting into bidding wars and letting their emotions dictate values instead of comps and sound financial judgment.
Any time you have emotions in the mix when buying a home, it’s bad news (for buyers anyway)!
So with that being said, what do you think that will mean for us investors?
Well let’s see, there will be less people buying because they can no longer pass the ‘stress test’ for an entry level home – so where must these poor, ‘down on their luck’ people live??
You got it, rentals!
Many of the first time buyers that WOULD have qualified prior to Oct 17th, 2016 will now be forced to continue renting, and for longer. Likely until they can boost their income levels to pass that stress test and qualify for a home that they actually like.
But That’s Not It
As a realtor and active investor buyer, I can’t tell you how annoying the bidding wars were getting. Well, we should see a significant decline in those as well as the classic (and overused) realtor tactic of holding offers and such and such date (man I hated those! … oh well!).
So let’s quickly go over the positives that these changes will bring to us.
Less buyers + less bidding wars = More opportunities for us to actually get deals again!
And not even deals, just purchases based on sound financial principles. Like I don’t know, umm, comparable solds maybe! Remember those??
Emotions should start to leave the negotiating tables, which is great for us investors! But, it’s not ALL good news …
Yes, the new mortgage rules will bring some cons. It’s not all fun …
Because buyers can’t qualify for nearly as high as an amount (analyst have said on average 20% less), it may mean that sellers might not want to move up just yet either. Which means less properties on the market to choose from.
In Kitchener-Waterloo and Cambridge, a second time seller would likely have purchased an ‘entry level’ semi detached home for example at $250,000, and would normally upgrade to a detached home around $400,000-$500,000 say 5-7 years later on average.
Well it the second time buyer can only qualify for a $350,000 small detached home, they might now say, “nah, it’s not worth it. We’ll just stay where we are for a little longer.”
However, it is proven that a lot of second time buyers put down 20% or more on their second home, that’s to all the appreciation they’ve made on their first home.
So I don’t see us being in the situation we were in a few months ago with a shortage of homes on the market, but I can almost bet some people that would HAVE like of sold and upgraded, will just stay where they are.
“But What About Those Toronto Buyers Though!?”
Ah yes, lots of people are talking about this as well.
Kitchener, Waterloo and Cambridge have been seeing a fair amount of GTA buyers (yes, not A LOT as the headlines say, SOME!) coming down the 401 for our cheaper housing.
Now with the new mortgage rules in place, market ‘bears’ are yelling about the influx of GTA buyers taking over KWC will be even more dramatic.
Do you REALLY believe people from Toronto, Brampton and Burlington are really going to trade their lives for a little more house? Do you really think they’re going to embrace the WORST drive in North America every morning (the 401 stretch from London to Toronto was voted the worst traffic stretch in North America by many studies)?
I find it hard to believe that people are going to sit in traffic 3 hours a day (minimum!) just so they can get some extra square footage for their buck. Please!
Yes some, no doubt, but I don’t see them coming by the droves and buying up all of our homes, that’s crazy!
What About A Housing Correction
Yes, another fear a lot of market bears are yelling about – and they may be partly right.
There could be a correction because of these new rules kicking out so many buyers. Prices will likely have to adjust in relation to the craziness that we’ve been seeing.
But is that such a bad thing? Again, we’re investors.
We’re not in this for the quick buck (most of the time). We’re in this for rental properties.
So what happens when a market corrects and slows down? We hold and wait out the storm!
That’s the beauty of long term real estate. Yes, markets will dip, that’s good!
And yes, there will be another boom. There always is, so what!
As long as we’re buying in good, stable economic areas that have steady growth (like Kitchener, Waterloo and Cambridge), it’s pretty hard to LOSE money.
Be smart, take advantage and work with the current mortgage rules and see your business succeed!
Remember, if you’re a SMART and STRATEGIC investor, you can ALWAYS make sound profits in ANY markets. We just have to adjust, not jump off the boat completely!
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