The Conference Board of Canada’s Chief Economist Craig Alexander offers the following insights on the federal government announcement on mortgage insurance and real estate tax compliance.
Today, the Government of Canada announced a sixth round of policy action aimed at reducing the risks related to real estate and household debt in a low interest rate environment. The Government is also ensuring that foreign real estate buyers are paying appropriate taxes on their investments. These measures are prudent, with a modest impact.
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.
- Today’s announcement of further tightening of mortgage insurance rules and income tax compliance on real estate capital gains are welcome measures to help mitigate real estate and personal debt risk in the continued low interest rate environment. It should be stressed that the measures are incremental and will only have a modest impact on real estate markets.
- This represents the sixth round of policy action on housing and mortgage borrowing since 2008. It represents a policy of steadily, and gradually, leaning against potential imbalances in real estate and household debt. Past measures have been effective in tempering mortgage debt growth. The measures announced today should add to the cooling in the Greater Vancouver market and have a slight, but desirable, moderating effect in the Greater Toronto market—the two regions where there are the greatest concerns about price and debt imbalances.
- There were four key announcements:
- As of October 17, 2016, Canadians taking a 5-year fixed mortgage will now be income tested to qualify for the loan on the basis of the 5-year posted mortgage rate, not the rate the individual negotiates with the lender. Since buyers often receive a discount, the posted rate is usually a bit higher than the transaction rate. The number of Canadians who will no longer qualify for a mortgage will be extremely small, as the difference in rates are not dramatic.
- After October 2, 2016, permanent non-residents (i.e., foreigners not residing in Canada) will have to pay taxes on any income gain from selling Canadian real estate. This is a measure to tighten compliance with Canadian tax law that allows tax exemption on principal dwellings. This measure will make Canadian real estate less attractive to non-residents who were counting on avoiding taxes on real estate capital gains. The impact of this measure is uncertain, because there is no data on foreign buying and tax avoidance.
- As of November 30, 2016, low ratio mortgages (those where the buyer puts 20 per cent or more down) that lenders subsequently wish to purchase government insurance must meet the tighter eligibility criteria of high ratio mortgages. This will likely strengthen the lending standards of some low ratio mortgages or reduce the use of government insurance by lenders.
- The government is launching a consultation about the possibility of making lenders bear some of the risk on government insured mortgages when a default occurs. If this occurs, lenders will likely charge more for high ratio insured mortgages because they carry a potential loss. The government is not taking action today, but this measure could raise borrowing costs if implemented in the future.