Hey Ottawa, Where Are the Lawn Signs?

By tightening mortgage qualification rules to slow down Canada's red-hot housing markets, has the federal government inadvertently fanned the very flames they meant to douse?

As J.D. Smythe, an industry peer in Ontario so eloquently explained last week, two things make prices go up: strong demand, and low supply. Witness the real estate markets of Toronto and Vancouver, which the Feds have fixated upon as “pockets of risk.” Purported concerns over both a housing bubble and rising Canadian household debt have compelled the state to try to cool things off.

Ottawa has focused on the demand side of the equation to solve this. Indeed, they’ve been steadily turning down the proverbial mortgage wick since 2008; and the latest rules imposed last fall (with more to come in a few weeks) took away about 20% of personal mortgage borrowing power in one fell swoop. And while less overall debt is prudent for the Canadian consumer, the jury is still out on the effect these rules have had on the markets.

As I write I’ve not yet looked at March 2017’s MLS statistics, but can tell you from my view in the trenches that certain neighbourhoods in Greater Vancouver remain STRONG seller’s markets this spring. Sales over asking price on the heels of multiple, subject-free offers are persisting. To top it off, some Realtors are reporting that the winners of the latest bidding wars are not foreign nationals. Moreover, those requiring mortgage financing in order to win the bid are still qualifying despite the latest restrictions levied by Ottawa.

So if buyers aren’t the issue, it follows logically that lack of supply is what continues to drive prices up. Hardly anything is for sale. Why? And how do we increase supply? Of course there’s always the argument for densification – and now is as convenient as ever for the condo developers to be lobbying.

But for today, let’s keep it simple: what about our existing housing stock? It’s not like all those homes vanished. And with windfall increases in value over the past couple of years, one can imagine that several homeowners are thinking, “cha-ching.”

So where are the lawn signs? Why aren't people selling?

Here’s one theory: the very same mortgage tightening meant by Ottawa to scare buyers away, is now “trapping” certain sellers in their current homes.

The number of clients who have come to me in the past year, thinking about cashing out and making a move, is what compelled me to write this. Many of these folks bought their homes around a decade ago, when - for better or for worse - the bar for mortgage qualification was much, much lower: think 40-year amortizations. Big, high-ratio mortgages for the self-employed, based on their declared income. 100% financing and cash-back products. Variable rates at deep discounts to Prime, which worked out brilliantly after the financial crisis of 2008 – one client’s rate was as low as 1.40% in the spring of 2010. All they've ever had to do in the past decade is renew their mortgage at the maturity of each term. They've been blissfully ignorant of the changes backstage.

Until today. Sitting across from me. Staring blankly, digesting bad news. Thanks to the series of rule changes and depending on their personal profiles today (which in some cases have changed dramatically since they bought way back), they won’t even qualify to port their OWN mortgage to another home, let alone qualify for a new one anywhere close in size or at comparable rates. This despite the potential for a very significant down payment arising from if and when they sell.

And so the “move-up” – perhaps even the “move-sideways” – concept dies for many on the vine, unless the move out of the neighbourhood is so far as to change schools, branches, jobs, lives. Given all of this, many would-be clients politely walk out or hang up, never to be heard from again. It’s status quo for their homeownership plans. Renew, renew, hang tight. And another lawn sign is stillborn.

By attempting to deflate demand through mortgage tightening, the Feds may have inadvertently pent up at least some supply. Making it tougher to qualify for a mortgage affects many buyers...including some who would otherwise be selling first.

Whoops. Just a theory, let’s see how it pans out.