Canadian regulators are trying to find a way to stop the skyrocketing prices in Toronto and Vancouver, the two most expensive housing markets in the country.
Three federal agencies have gotten together to oversee home borrowing. The first thing that they are planning to do is to raise the down payment requirements for homes that cost over $500,000. The second thing that they are doing is making it more costly for banks to fund lending to those markets.
The reason for these changes is that the policy makers are worried that Toronto and Vancouver have become over inflated, which can put the nation’s financial system at risk. Finance Minister Bill Morneau has come up with a balancing act, which will target high end homes in these two cities. At the same time, there will be no major decline in areas of the country where prices are flat or falling.
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Over the past few years, the housing prices in Toronto and Vancouver have gone up. The country’s leaders want to make sure that an environment is created that protects people that are buying their homes, and that they have enough equity in their homes. Mr. Morneau has stated that he does not believe that Vancouver and Toronto are in the bubble territory.
Due to years of rising prices and the increase of condo development, the International Monetary Fund and Canada’s housing agency has issued warnings. In order to offset the oil price collapse, the Bank of Canada has cut their interest rates, and that is not expected to rebound in the near future.
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The average price of a home in Vancouver has gone up to $1.6 million. It is believed that the large amount of foreign buyers is behind this increase. In Toronto, the average price of a home is $1 million. As a result of these increases, the Canada Mortgage & Housing Corp, the Office of the Superintendent of Financial Institutions, and the federal finance department have been tightening measures.
Mr. Morneau held a press conference outside the House of Commons where he stated that the down payment on homes between $500,000 and $1 million will double to 10 percent. For homes costing less than $500,000, the down payment would remain at its current 5 percent. If a home is worth over $1 million and it doesn’t qualify for government insurance, buyers would still need to come up with a 20 percent down payment. It is estimated that 5 percent of new sales in Toronto and 2.5 percent of new sales in Vancouver will be affected by the change.
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The OSFI stated that in case of default, that it would raise the minimum amount of capital that insurers and lenders need to set aside on residential mortgage loans. When it comes to larger banks, the capital requirements would be tied to income and local housing conditions.
The main reasons for the changes in these changes is to help insurance providers and the banks absorb severe losses. By 2017, new regulations will be in place after the bank regulator consults with a private sector.
Canada Mortgage and Housing Corp have stated that they are going to set high fees for guarantees that they offer on debt backed mortgages. This is because they want to aim to encourage the development of private market funding alternatives.