Vancouver foreign buyers now shopping for Toronto real estate, albeit in smaller numbers, report finds
Vancouver’s foreign buyers, scared off by a 15 per cent tax additional property transfer tax that only applies to them, appear to be making their way to Toronto, according to a new report.
But Diana Petramala, the economist with Toronto-Dominion Bank, who wrote the note out Friday, says the impact on Toronto is no where near what was happening in Vancouver. Canada Mortgage and Housing Corp. said at the peak up to 20 per cent of buyers were foreign until the tax went into effect on Aug. 2 in Vancouver.
“The million dollar question now is whether foreign investment has shifted east and Toronto has become the new Vancouver. With record immigration in 2016 and the strong growth in prime first-time homebuyer population, the fundamental factors supporting housing activity appear stronger in Toronto than Vancouver – helping drive existing home sales and prices up,” said Petramala. “Having said that, the sales-to-population ratio in Toronto has risen sharply recently, suggesting that foreign investment and speculation are playing a part, albeit likely smaller than in Vancouver.”
Her comments come as the Canadian Real Estate Association released results for September on the same day which show the strength of the Toronto market continues to impact national sales figures just as Vancouver, which suffered almost a 33 per cent pullback in September sales compared to a year ago, retreats.
CREA, which represents about 100 boards across the country, said existing home sales rose 0.8 per cent in September from August on a seasonally adjusted basis, but remain 5.6 per cent below the high hit in April, April 2016.
“The finance minister’s recent changes to regulations affecting mortgage lending has added to housing market uncertainty among buyers and sellers,” said Cliff Iverson, the president of CREA. “For first-time home buyers, the stress test for those who need mortgage default insurance will cause them to rethink how much home they can afford to buy.”
Among the changes are that all mortgage insurance backed by Ottawa include a provision that the borrower be forced to qualify for a loan based on the much higher rate posted rates of the major banks for a five-year fixed rate mortgage, now 4.6 per cent. Instead of 1.95 per cent, the lowest rate for a fixed five year mortgage, according to ratespy.com, consumers must now use the higher rate and get a smaller loan or not qualify at all.
Those new loan figures go into effect Monday and they could impact about one-third of all new borrowers, according to some estimates. Petramala said the regulations could take some steam out of the market and is predicting a 10 per cent decline in sales next year and a one per cent reduction in prices.
“This is the sixth time in eight years that the government has tightened mortgage regulation, and in each event, sales have fallen between 6 per cent and 14 per cent in the following three to six months,” she said. “The difference this time around is that the rules are more broadly targeted at insured borrowers (raising the bar on income testing), lenders (restricting the use of portfolio insurance) and foreign investors and speculators (increasing oversight of capital gain taxes on real estate and restricting non-residents from taking advantage of the principal residence exemption).”
Doug Porter, an economist with Bank of Montreal, sees similar storm clouds on the horizon for housing from the government’s changes.
“Prior to the new mortgage rules, the dominant story in Canada’s housing market was the diverging paths of previously white-hot Vancouver and still piping-hot Toronto. We are all along the market watchtower now, though, looking for some broad softening in sales in the wake of Ottawa’s new measures,” said Porter, who expects a five per cent drop in sales in 2017 and only a one to two per cent gain in prices next year after a 12 per cent rise in 2016.