For one slender cadre of house hunters in the Canadian real estate market, the landscape is about to change.
On Feb. 15th, the federal government’s new rules requiring higher minimum down payments on certain properties will come into effect.
The looming deadline appears to be one reason why recent bidding wars have been so heated in the Greater Toronto Area, where plenty of houses sell in the price range targeted by the feds.
Last week, Michael Elmenhoff, a broker with iPro Realty Ltd., had more than 100 parties book appointments to see an east end rowhouse he had listed with an asking price of $499,000. Two weekend open houses were also packed. On offer night, the house on Jones Avenue south of Danforth Avenue received 13 bids and sold for $650,000, or about $150,000 above asking.
It became apparent from talking to potential buyers and their agents that the increased activity in that price range at present is really driven by the upcoming change, Mr. Elmenhoff says.
“It’s very real,” he says. “I was really blown away.”
Like many in the industry, Mr. Elmenhoff hadn’t expected Ottawa’s changes to have a big impact.
Under the rule change announced last year, the minimum down payment for new insured mortgages will rise to 10 per cent from 5 per cent for the portion of the house price above $500,000. The 5-per-cent minimum for properties up to $500,000 remains unchanged.
Ottawa had already restricted mortgage insurance to homes valued at less than $1-million, and the new rules leave the minimum down payment for more expensive homes unchanged at 20 per cent.
For most buyers, the tighter rules don’t mean much because they’re either paying less than $500,000, or they’re so far above it they tend to be move-up buyers with a down payment greater than five per cent anyway.
But for first-time buyers in Toronto, $600,000 is an entry-level price for a single-family house. The average selling price in the Greater Toronto Area stood at $609,110 at the end of 2015.
Sandra Pate, an agent with Royal LePage Real Estate Services Ltd., Johnston and Daniel Division, is anticipating a lot of action at a house she and her partner just brought to market in the east end. The bungalow at 121 Harcourt Ave. is listed with an asking price of $679,900.
The offer deadline is set for Monday night.
Ms. Pate is also seeing lots of buyers circulating as they rush to get ahead of the rule change. She adds that the lack of snow in the city this winter is also making it easier for people to get around.
Mr. Elmenhoff points out that the new rules will mean the buyer of a $600,000 house will have to come up with a down payment of $35,000 instead of $30,000.
Younger people in particular often have to save, borrow and scrape to come up with a down payment at all. Finding an extra $5,000 is not insignificant.
“That’s a lot of money for these first-time buyers who can hardly afford to get into the market to begin with.”
Mr. Elmenhoff, who has been selling real estate in downtown markets for 30 years, doesn’t think the spring market has started early – though the mild January weather probably helped, he says. His advice to buyers is to hold off a little bit, when he thinks there will be less competition in the segment affected by the changes.
“There’s no longer that sense of urgency,” he says.
Between the middle of February and the end of March, he thinks listings will remain tight and the market will cool a bit. Towards the end of March, listings will swell and buyers will have more to choose from, he adds.
Meanwhile, house hunters looking for single-family dwellings may find that the lack of supply eases in the coming years as developers switch towards building more low-rise sub-divisions again.
John Andrew, a professor at Queen’s University, says increased sales of developable land, along with rising applications for building permits and zoning bylaw variances, all point to more low-rise building.
“Those are all signs that development is going to kick into higher gear.”
Prof. Andrew, who is also director of the Queen’s real estate roundtable and executive seminars, notes that the shortage of single family housing has pushed up the premium that houses command over condo units to its highest level.
Meanwhile construction starts in the multi-residential segment are finally beginning to slow down, he adds.
For the past several years, the high cost of land has made it more profitable for developers to build condo towers.
“It’s just been difficult for them to get their hands on developable land.”
The greenbelt that constrains building around the GTA has been another factor, along with the costs that municipalities have been passing along.
But Prof. Andrew says changing economics make it more appealing to developers to build houses now. Buyers are willing to pay higher prices and drive or take the GO Train farther to reach them.
“It’s really leap-frogging the greenbelt.”
For developers who are still building in the city, apartment buildings continue to gain in popularity, he adds.
Big investors such as real estate investment trusts, pension funds and life insurance companies will buy an entire building from the developer.
“Typically they’ll buy the whole thing and, if they could buy five, they would.”
The investors view buying an apartment building in a city such as Toronto as about as stable an investment as they can find. New immigrants and unemployed workers migrating from Alberta and Saskatchewan are driving up demand, he says.
“The more expensive single family homes get, the more attractive apartments look.”