First-Time Buyers Will Survive The New Rule

FT buyers FBThe days of buying near-million-dollar homes with 5% down are officially over.

The new minimum equity rules for purchases between $500,000 and $1 million began Monday. The regs now require 5% down on the first $500,000 and 10% down for the remaining portion. As before, purchases of $1 million+ still require at least 20% down (if you want the best rates).

This news was all over the press today, as expected. One of the prominent questions was, how will young buyers fare?

Some, like this broker, suggested that first-timers are the losers, and that the market “didn’t need” this rule. At the very least, that’s debatable.

For one thing, we know that less than 1 in 10 rookie buyers purchase homes over $500,000. Of the minority who do, we’d guesstimate that somewhere around half have down payments of at least 7.5% (the most a qualified borrower would need under the new rules). That’s based on the fact that almost 4 in 10 first-time buyers already put down 20% or more, says Mortgage Professionals Canada.

Of those who are shy the extra 0.1% to 2.5% of equity, many will tap their parents for more cash, some will use other debt sources and some will just defer their purchase 6-18 months or so, which may not be the worst decision as we watch how housing markets react to Canada’s economic challenges.

On the question of whether the change was needed, this rule wasn’t so much about slowing the housing market. No, policy-makers were more focused on limiting the federal government’s insured mortgage exposure. And, of all the ways they could have done that (increasing down payments to a flat 10%, shortening amortizations further, lowering debt ratio limits, etc), this was one of the most buyer- and industry-friendly moves they could have made. In a country where people earning $100,000 can’t buy a house in our biggest cities, and debt ratios keep on climbing, the Department of Finance did the right thing.

  1. Mortgage rule tightening by regulators over the past several years has been measured and gradual. Rightly so. Much to the chagrin of the housing bears, who seem only willing to embrace radical new regulatory directives that would be guaranteed to crash the market.

  2. Stop picking om the small guy in Toronto. The changes to down payment of itself is not huge, but add that to cmhc’s increase to premiums for 5% downers and Toronto’s insistence of the extra land transfer, (for everyone) and the numbers are huge Using a $750,000 purchase price, and old down payment, the buyers faced $ 29,000 in cmhc costs, and $22,000 in land transfer fees, before down payment and closing costs . So $51,000 in lost monies at closing before considering the new added $12,000 in down payment, and the legal costs and… All while Toronto jumps further out of reach. Yes, there are first time buyer rebates, and yes, you are probably saying these lowly buyers should not be buying now, but the reality is that traditionally, the lower down payment buyers have not lead to proportionately higher losses, than higher down payment buyers… so stop picking on them.

  3. The $750K to $1 Million “starter home” it is such a unique concept. Because we Toronto and Vancouver have heard it for a few years we start to think it makes sense but go to 90% of the cities in North America and it makes ZERO sense. I know Toronto is not Houston, Chicago, Atlanta, Denver or Phoenix but in those cities a starter home is less than half the price. I understand all real estate is local but still, should we not start to ask rational questions about the sustainability of these property values?

    1. Define sustainable. Toronto home prices have increased for 18 years in a row. Vancouver surpassed Toronto in average home price in 1989 and has never looked back since.

      Incidentally, when comparing Toronto and Vancouver to other cities perhaps you might consider the likes of Hong Kong, London, Moscow, New York, Paris, San Francisco, Sydney and Tokyo.

      http://m.huffpost.com/ca/entry/8810878

      1. Just to be clear Ray, you think 10% increases in Toronto or 17 % increases in Vancouver per year in property values are sustainable numbers? And it’s the same English language version of sustainable that means “can continue over time” right? That is the definition of sustainable I understand.

      2. Holy Hannah Ray, I just saw the author of the Huff Post blog that you were citing was Big Ben Meyers from Fortress Surreal Development. Ay Carumba!! Ray, if Ben Meyers is the fountain of Real Estate wisdom that you chose then you just validated my point.

        1. You still haven’t defined sustainable Ron, just repetition of what you believe is unsustainable.

          Your apparent astonishment and incredulity to the contrary are duly noted, however further clarification is required, as that which you claim is unsustainable appears to be quite the opposite.

          Here’s another example to ponder. I’ve been reading that ultra-low interest rates are unsustainable for over half a decade now, when in fact interest rates have been declining steadily for the past 25 years ( http://www.ratehub.ca/prime-mortgage-rate-history).

          What exactly is the “best-before” date on unsustainable?

          In addition, your ad hominem attack on the author of the article which I cited without discussing or debating the substance of the article is remarkably shallow.

          “Without data you’re just another person with an opinion.” – W. Edwards Deming

  4. Maybe it will increase savings habits of the “entitled” generation. Doubtful as they will just as their parents for more money when house shopping. And for those cleaning money…not a big deal.

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