The hottest new Canadian housing-market niche isn’t stacked urban townhouses or suburban condo towers, but homes of any kind priced just shy of $1-million, since federal government rules began favouring homebuyers paying in the six-figure range over bidders that break the million-dollar mark.
While many economists believe that Canada’s housing market will come in for a soft landing, Toronto’s condo industry still feels uncertain.
The market for homes under $1-million has become “red hot,” agents say, and that’s at least partly because new rules brought in by Ottawa last year make it impossible to get a loan backed by mortgage-default insurance if the property is valued in the seven figures.
The result: Bids for $999,999, or close to it, are increasingly common as even some wealthy would-be homeowners struggle to secure the necessary financing under new government rules.
“It’s created an artificial hot market for homes under $1-million because you just don’t try to go over that amount,” said Vince Gaetano, a principal at mortgage broker,monstermortgage.ca. “Housing sitting just above $1-million is sitting just a little bit longer.”
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But fewer buyers in the marketplace for homes at $1-million-plus, means an opportunity for those who can come up with a big enough down payment that they don’t need default insurance to qualify for a mortgage. “There’s a deal to be had,” said Mr. Gaetano. “You see all these homes selling in the $900,000s and [sellers] are sitting there with a home listed for $1,050,000 and wondering what is going on.”
Toronto real estate agent David Batori said he just sold a house for $999,900 after the bidder’s agent said his client just wouldn’t go any higher.
“The agent said ‘we can’t go over a million bucks under the new rules because we have only 5% down,’” said Mr. Batori.
Anyone with less than 20% down and borrowing from a financial institution regulated by the Bank Act must purchase mortgage-default insurance.
Canada Mortgage and Housing Corp., the federal Crown corporation that controls about 75% of the mortgage-default insurance market, says those larger home loans still represent a small portion of the market.
It’s created an artificial hot market for homes under $1-million because you just don’t try to go over that amount
At the end of the first quarter of 2013, just 4% of CMHC’s total insurance-in-force portfolio had an outstanding loan amount exceeding $550,000, which was one percentage point less than the same period in 2012.
Still, Mr. Batori said the new rule has become a factor in the Toronto market. “Under $1-million is going crazy. It’s red hot,” he said, noting the house he sold for $999,000 was originally listed for $1,039,000. Meanwhile, he had a similar home listed for $849,000 that attracted nine offers and ended up selling for $951,000.
Doug Porter, chief economist at the Bank of Montreal, said the trend would only have a notable impact in the four priciest markets: Toronto, Vancouver, Victoria and Calgary. Nevertheless, he said this kind of market distortion is to be expected when the government draws an arbitrary line in the sand.
“It doesn’t surprise me at all,” said Mr. Porter. “You’re going to get distortions or breaks in the market when you have set levels.”
He assumes the federal government probably would not be too concerned by the phenomenon, since regulators designed tougher mortgage rules specifically to cool down Canadian housing prices.
“This is probably exactly what policy-makers were hoping to achieve taking some froth out of the market,” said Mr. Porter. “Below that [$1-million level] it might get a bit of a boost, but the flip side is everybody above [experiences a sales hit], so it’s offsetting.”
Ray Harris, president-elect of the Real Estate Board of Greater Vancouver, said the limit on mortgage-default insurance for $1-million homes probably hasn’t had a significant impact on the Vancouver market.
“We do informal polling every month and we see 75% to 80% of buyers do not need CMHC mortgage insurance,” said Mr. Harris. “I think … the rules just told people to stay within their means, anyway.”
While Vancouver’s downtown market attracts a lot of headlines with single-family detached homes selling well over $1-million, Mr. Harris said there is plenty of product available below that threshold. “It’s definitely just a sliver of the market. The majority of people paying $1-million have more than 20% down,” he said.