Mortgage Broker / Consultant – Burlington Post Readers' Choice 2020

Jivan Sanghera Won Gold Winner 2020 The Burlington Post Readers' Choice Awards as one of the best mortgage broker and consultant.

New CMHC requirements will have buyers flocking to the market: brokers

Experts in the real estate industry say CMHC’s new, strict lending measures will trigger a surge in home purchase volume as potential home buyers rush to the mortgage market before July 1, when these policies take effect.

“Whenever there has been a deadline given for a major mortgage rule change,” Ron Butler, mortgage broker at Butler Mortgage, told Yahoo Finance Canada “there has been a distinctly accelerated pace of transactions prior to that change.” Butler described that this has been the case with any rule change that was not immediately invoked.

CMHC’s new measures, which include at least one applicant having a minimum credit score of 680 and a maximum debt service ratio of 44 and gross debt service ratio of 35, mean that prospective home buyers who don’t meet the new requirements have a tight deadline to meet.

It’s an issue that resonates with Jivan Sanghera, mortgage broker at Circle Mortgage Group. Sanghera described a family he has been working with who would have qualified for a $900,000 mortgage before the measures, would now qualify for $790,000, losing about 12 per cent of their purchasing power.

“These are people that have been saving over time, don't have an income interruption and don't perceive an interruption in their income. The credit scores are already fine,” Sanghera explained, “They're being told for no reason other than underwriting rules that they no longer qualify for what they want.”

Sanghera said that with the economy slowly emerging from the COVID-19 crisis and Canadians are beginning to transact again, this is the wrong time for CMHC to introduce these stricter measures. The short-term scramble to be approved for a mortgage and purchase a home in a tightening window will boost the sales-to-listing ratios in a major housing market like the Greater Toronto Area.

“Now you are going to put further short-term pressure on prices,” Sanghera explained, “What is being solved here other than reducing risk for the bank? That's the only thing I keep seeing this come back to.”

In a press release, CMHC president and CEO Evan Siddall explained that the measures were to “protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

Sanghera responded. “Of course, we do not want people to be overextended. In the same regard, at what point is CMHC intervening in a free market?” he asked.

Ben Rabidoux, president of North Cove Advisors, doesn’t agree with the ‘free market’ characterization of the mortgage market. “The entire mortgage lobby has a direct federal guarantee and multiple layers of direct federal guarantees that subsidized them, so cry me a friggin’ river,” Rabidoux told Yahoo Finance Canada.

“The government from time to time has the right and should be re-evaluating their position given the changing risk landscape. That's how that's supposed to work. It's not a free market.”

CMHC also said in their statement that the aim of some of these measures would help manage the risk to their insurance business.

Butler noted that the soaring household debt levels in Canada, much of it driven by mortgage debt, are a factor in the CMHC decision.

“At the end of the day, an insurance company has to wisely consider how to operate their business.”

From CMHC to the private sector

As CMHC tightened its measures, it left many who analyze the industry wondering what the next step for private companies will be. Around the same time CMHC elected to tighten its measures, HSBC introduced a record-low 1.99 per cent rate on a five-year fixed mortgage. It was the first bank to break the two per cent barrier on the five-year fixed, according to Rate Spy.

“At this point, the big question is whether the private insurance will follow suit,” said Rabidoux.

On Monday, Genworth MI Canada Inc. announced that it has no plans to follow CMHC’s lead on tightening mortgage requirements. The standards to debt service ratio limits, minimum credit score and down payments are expected to stay the same. Canada Guaranty Mortgage Insurance Company has yet to comment on whether or not it will follow CMHC’s mandate.

“I think the biggest change is the debt service ratio. That's the one that has the potential to be quite disruptive,” said Rabidoux, adding that there could be a potential workaround in the private space.

Coronavirus is already taking its toll on Canada's real estate market

The real estate frenzy in Canada’s biggest markets is headed for a chill as anxiety rises over the economic fallout of the coronavirus.

A call for social distancing means far fewer people will be opening up their homes to potential buyers.

RE/MAX wants its realtors in Ontario, the Atlantic provinces and Western Canada to cancel open houses until COVID-19 is under control.

“While almost all real estate brokerage firms have embraced digital tech and realtors are able to utilize signature platforms and other tools to conduct business, once showings, open houses and other in-person business is restricted, there will definitely be a drop off in transactions,” John Lusink, president and broker of record at Right at Home Realty, told Yahoo Finance Canada.

“We expect to see a drop in sales but this will take a month or two to filter through into the actual results.”

Buyers will also likely put their plans on hold.

“Obviously there has been an immediate pause in market activity as everyone tries to figure out what happens next,” Steve Saretsky, realtor and author of real estate blog Vancity Condo, told Yahoo Finance Canada.

“We are seeing buyers move to the sidelines and sellers put some of their listing plans on hold.”

But that doesn’t mean the end result will be more affordable homes.

“The way I see it the housing market is basically frozen... no buyers and no sellers,” Benjamin Tal, deputy chief economist at CIBC Capital Markets, told Yahoo Finance Canada.

“That in a way will limit or even eliminate any notable downward risk to prices. Simply the number of sales will go down dramatically.”

Measures to shore up the market

The Bank of Canada announced two interest rate cuts in March, which led the country’s 6 biggest banks to lower their prime rates that determine variable mortgage rates.

Lower interest rates can serve as rocket fuel for home prices, but that won’t likely be the case this time.

“Low interest rates are not helping here much since we have reached a point in which reduced confidence takes over improved affordability,” said Tal.

The Bank of Canada also announced new measures to ensure liquidity during the COVID-19 pandemic.

Canada’s 6 biggest banks saw their lending margins increased and say they will cut clients some slack, including allowing the deferral of mortgage payments.

"Effective immediately, Bank of Montreal, CIBC, National Bank of Canada, RBC Royal Bank, Scotiabank and TD Bank have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; childcare disruption due to school closures; or those facing illness from COVID-19," the banks said in a statement.

"This support will include up to a six-month payment deferral for mortgages, and the opportunity for relief on other credit products."

Saretsky says he expects borrowers to take the banks up on their offers.

Effects across sectors

Jivan Sanghera, president at Circle Mortgage Group, says he’s getting ready to close his office and work from home.

“I have a feeling it's just a couple more days work and we won't have much to do,” Sanghera said.

“I can't see why people would even consider listing their homes for sale currently with the risk that strangers bring.”

Housing starts data will tell us how badly the homes that were supposed to be under construction will be hit. Tal says the effects are already being felt.

“The main damage will be in the new construction. We are already hearing about cancellations of pre sales as developers are unable to get the financing due to weak demand that will continue, so expect notable slowing in housing starts.”

A slowdown in that part of the market means that, along with realtors and mortgage brokers, construction workers will take it on the chin too. But there is some light at the end of the tunnel.

“We have to remember that this crisis has an end game, a vaccine. So knowing that is shaping the reaction curve of governments,’ said Tal.

“You just try to ride the wave until we reach that point which will take a while.”

Appraisal Institute of Canada
Appraisal Institute of Canada is the premier real estate appraisal association in Canada. The institute is a self-regulating body whose mission is to protect the public interest by ensuring highest standards, practices and professional conduct in real estate appraisals.

Bank of Canada
The Bank of Canada is the nation's central bank. It is responsible for Canada's monetary policy, bank notes, financial system and funds management.

Trans Union Canada
Trans Union Canada is another consumer credit reporting agency providing credit reporting services to Canadian consumers. Trans Union Canada is also a great source of credit-related information.

Canadian Revenue Agency (CRA)
The Canada Revenue Agency (CRA) administers tax laws for the Government of Canada and for most provinces and territories; and various social and economic benefit and incentive programs delivered through the tax system.

Each year, the Municipal Property Assessment Corporation (MPAC) prepares an assessment roll for every Ontario municipality. The roll provides the assessed value of all the properties in a municipality or in the jurisdiction of a school board with taxing authority.
MPAC also prepares supplementary assessment lists, which municipalities use to add in-year tax revenue from new construction or major alterations to properties.

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