Why Canada’s New Mortgage Rule is Great News for Condo Investors
Today the new Finance Minister Bill Morneau announced a significant change to the mortgage rules in Canada for property buyers.
If you skip to the end of this article you can see more details into what the rule is exactly and how it breaks down, but if you are reading this you are probably a condo investor wondering how this will affect you.
DEMAND FOR CONDOS JUST GOT A SHOT IN THE ARM
What the government effectively is doing is artificially increasing demand for properties under $500k (i.e. condos) and decreasing demand for properties over $500k (i.e. houses).
I’ve been arguing for the last 2 years that the soaring house prices of the GTA will spill over into the condo market at some point and we will see condo prices also rise. The two markets are not disconnected.
And this is exactly what is happening in 2015.
This year we are seeing average condo prices increasing at higher rates than they have in the last 5 years (around 5-7% average increases this year, compared to around 2-4% in the last several years).
HOW THE NEW MORTGAGE RULES WILL INCREASE DEMAND FOR CONDOS
House prices are just completely out of reach now for the majority of buyers and they are giving up and shifting their focus on the condo market. This increase in demand is driving prices higher.
Houses just became more unaffordable for first time buyers with this new mortgage rule. A big chunk of would-be home buyers are now waking up today and deciding to buy a condo instead. Increased demand = rising condo prices in 2016.
Not only that, but move-up buyers are affected too.
Current condo owners who are planning on selling and upgrading to a house will now have to delay those plans a little bit longer in order to meet the new requirements.
This means a big chunk of condos that were going to come onto the resale market in 2016 will not be. Decreased supply = rising condo prices in 2016.
THE CONDO MARKET OVER THE NEXT 5 YEARS
This will be the central story of the condo market over the next half decade: prices and rents will continue to rise as housing demand shifts more and more away from houses to condos.
Today’s new rule by the government of Canada will only serve to exacerbate this trend.
All good news for condo investors who are investing today and who understand that the condo bubble is a myth and that the future of our city is in high rise living.
THE NEW RULE
Effective February 15, 2016 properties over $500,000 will require a 10% minimum downpayment.
It’s important to note that the 10% rule is it is only for the amount over $500k.
So if you are buying a property for $600k then you would need to come up with minimum 5% on the first $500k (=$25k) and 10% on the balance of $100k (=$10k).
So the total downpayment required on $600k purchase is $25K=$10K = $35K.
Minimum down on $500K = $25K (5.0%)
Minimum down on $600K = $35K (5.8%)
Minimum down on $700K = $45K (6.4%)
Minimum down on $800K = $55K (6.9%)
Minimum down on $900K = $65K (7.2%)
Minimum down on $999K = $75K (7.5%)
Minimum down on $1M = $200K (20%)
[Properties over $1M still do not qualify for CMHC insurance and therefore must have a minimum 20% downpayment – this was an existing rule that will not change.]