When buyers rule

Did you miss the news late last week?

“Once again, you can’t make this shit up,” says our fav, crusty old Boomer loans broker. “the Canadian bank regulator says now is the time for a close look at mortgage lending Sigh…..

“When mortgage holders are bleeding from high rates and house prices are STILL batshit crazy,” adds Ron Butler, “now is the time to tighten lending rules? Last 3 Years, everything was just peachy, couldn’t do anything? What world are these folks in that facts take years to absorb?”

What he’s ragging on is OSFI, the Office of the Superintendent of Financial Institutions. The banking cop. It has one, and only one, duty – to protect the integrity, viability and stability of the banking sector. It’s not about you. It’s about them. OSFI doesn’t actually think of real estate sales or prices. It cares about the risk posed by a giant, historic pile of mortgage debt – most of which belongs to the banks.

So what’s the issue in 2023?

“Unprecedented house price increases have been accompanied by record levels of household indebtedness, of which residential mortgages account for a large share,” says the regulator. “Federally regulated financial institution lenders, which hold approximately 80% of all residential mortgages in Canada, are exposed to heightened risks from this indebtedness.”

This means the rules of lending will change. For the next 90 days the agency will be hearing comments from lenders, realtors and bankers, and then the hammer will drop. There will be three major changes, all aimed at forcing Canadians to borrow less.

Three major changes to restrict mortgage credit

Loan-to-income and debt-to-income restrictions will put a cap on the amount a person can borrow based on what they earn or their total indebtedness. This is designed to curtail loans to people borrowing 450% (or more) of their income. How many is that? Up to 40% of the entire mortgage industry. Yikes.

OSFI also wants to have “lender-level” limits in place, so companies making loans won’t be able to exceed a certain threshold of higher-risk mortgages. Additionally, the regulator wants the strict income-to-debt ratios in place for CMHC-insured (low down payment) loans to apply to all mortgages, regardless of how much equity a purchaser might have. And, as if that’s not enough, OSFI is suggesting the stress test – which now makes all borrowers qualify at more than 7% – be more “risk-sensitive”. So, for example, it might be a higher bar to leap if you want a variable-rate mortgage rather than one with a fixed rate, or a two-year term instead of five.

“Lenders still face increased risks,” says the regulator. “Mortgage interest rates are at their highest in over a decade. Borrowers are facing record levels of indebtedness. Additionally the pace of economic growth in Canada is slowing and is expected to moderate further, with the potential for downside global risk due to the combined tightening of central banks.”

Well, there ya go. Just when 2023 was about to deliver the worst end-to-end residential real estate market in decades (maybe forever), OSFI decided to come down from the hills and shoot the wounded. You should expect implementation of these new restrictions by the summer. Might be a capital idea to sell before then, if that’s something you’ve been pondering.

Meanwhile, what’s going down on the streets?

Crickets. Sales have crashed. Normally the Spring market would be kicking off in a few weeks, but this year everything has changed. A snappy, impeccable, all-done, high-end urban semi listed for $2.6 million late last summer received no written offers. The price dropped to $2.4 million, also rentable for seven grand a month. Nothing. Now it ‘s $2.2 million.

And check out this vendor, which agent Stephen Glaysher chooses as his “motivated seller of the week.”

Motivated seller chops the price by $1 million

“As the calendar has turned to 2023 there have already been 100s of price drops signifying motivation and the realization of buying power amidst rising interest rates!” he tells clients. “Take this Summerhill listing in midtown Toronto for example… Originally listed at $4,999,990 this listing is now available with a 1 million dollar price drop to $3,990,990. Expect to see a large # of price drops as well as relistings at reduced prices following the holidays as sellers come to realizations of BUYERS MARKET Conditions!!”

Remember that interest rates go up again in a few days. It’s been 22 years since the prime rate at the banks has hovered in the 7% range. But back in 2001 properties in Toronto sold for an average of $251,500. Now the number is $1,189,850. Two mill is the new one mill.

The bank cop thinks that’s crazy risky. What if the bottom falls out? It believes people should be held back from financial suicide. And so they shall.

Did I mention selling?

About the picture: “Garth, I know you prefer dogs,” writes Valeh, “but you absolutely have to post this picture of my wedding officiants’ Scottish Fold kitten. So freaking adorable!”

Have a beast to share with the pack? Send a picture and some words to “[email protected].” – Garth