Ottawa eyes tougher new mortgage rules

The federal government may be ready to take direct aim at Canada’s red-hot housing market, and is actively consulting on a move to increase the minimum down payment required to buy a house, the Financial Post has learned.

Sources say that Ottawa has been studying proposals to increase the minimum down payment from five per cent and said the government is looking at adding restrictions for high-priced housing, which would hit hardest in Canada’s two most expensive cities — Toronto and Vancouver.

“They are definitely looking into this but it doesn’t mean that they will do it,” said one source close to the department, who asked not to be identified. Another source confirmed Ottawa is continuing to look at possibilities for increasing the down payment.

A source with the Department of Finance denied the government is considering any changes to the minimum down payment.

But any inclination to intervene in an already frothy urban housing market can only have intensified after the Bank of Canada announced Wednesday it would lower its benchmark overnight lending rate to 0.5 per cent, leading three major banks to cut consumer rates. Observers have warned that this will only further fuel rising home prices and sales.

Lowering the overnight lending rate is likely to lead in reductions to the prime lending rate used by consumers with floating-rate debt. TD Bank was the first out of the gate Wednesday to lower its prime lending rate, cutting it by 10 basis points to 2.75 per cent. Royal Bank went even lower on Wednesday night, cutting its prime rate to 2.7 per cent. Some financial institutions had already been offering variable-rate loans tied to prime for under two per cent.

Phil Soper, chief executive of Royal LePage Real Estate Services Inc., said the rate cut will probably be good news for the real estate industry and increase house prices in the short-term. “People don’t buy homes based on sticker price, they buy homes based on carrying costs. When carrying costs are lower, they acquire more home,” he said. But, in the long term, he is still worried about an overheated market and the potential for a correction.

Still, the industry has insisted there is no upside to increasing minimum down payments. It has long maintained that would have a disastrous effect on some people who struggle to get together enough money to buy into Canada’s hottest markets.

“The challenge with further restrictions is they impact the first-time home buyer which really isn’t the issue here. They’re not the ones buying detached homes worth more than $1 million,” Soper said.

Bank of Canada cuts rates again

The Bank of Canada cut its key interest rate by 1/4 percentage point to 0.5 percent, saying an unexpected economic contraction throughout the first half of the year had added to excess capacity and put downward pressure on inflation.

"Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target," the central bank said in its interest rate decision accompanying its quarterly Monetary Policy Report.

Bank of Canada Governor Stephen Poloz's expectation of a recovery by now from the oil price crash proved to be far too optimistic, with the economy projected to have shrunk at an annualized 0.5 percent in the second quarter instead of growing by 1.8 percent as he had projected in April.

The bank did not use the word "recession" but the projection of negative growth in the first and second quarters met the most widely accepted definition of recession.

Excess capacity therefore grew significantly in the first half and would continue to do so in the third quarter even with expected economic growth of 1.5 percent. The bank pushed back to the first half of 2017 from the end of 2016 its projection of when full capacity would be reached and inflation would return to the 2 percent target.

The bank acknowledged elevated vulnerabilities from a hot housing market in Toronto and Vancouver and from rising household debt - a key factor that had had some economists calling for no rate cut - but said the Canadian economy was undergoing "a significant and complex adjustment" and required additional stimulus.

Analysts predict lower rates for 2 years

Reacting the Bank of Canada’s cut in interest rates many economists are predicting they will have to stay low for some time. While talk of cheaper mortgages may be in focus for homeowners and buyers the wider economic picture painted by the BoC is one of sluggish growth for Canada this year. Two quarters of negative growth (0.6 per cent in Q1 and 0.5 per cent in Q2) means a technical recession and the bank cut its expectation for this year to just above 1 per cent with next year and 2.5 per cent in 2016 and 2017. That contrasts with growth in the global economy of 3 per cent for this year and 3.5 per cent in the following two years. Additionally Fed chair Janet Yellen said Wednesday that the US economy is on target for a rise in interest rates.

The cut in interest rates has already hit the loonie, although that should help exports which are a key part of the plan to boost the economy. Some analysts are skeptical as to whether Canada can achieve even the downgraded GDP forecasts and are calling for interest rates to stay low, and perhaps go lower, during the next two years.

GTA home prices increased more than any other Canadian region in last 5 years

Home prices in Toronto have climbed higher and higher over the last few years, but numbers released this month from the Canadian Real Association (CREA) show just how fast the acceleration has been.

The MLS Home Price Index for the GTA reached $557,900 in June 2015. This was an 8.94 per cent increase over the same time last year. Torontonians may no longer be shocked about year-over-year price increases of this size, but consider this: the Home Price Index in the GTA was also up 38.38 per cent from five years ago.

It was the biggest such increase measured by CREA, beating out Greater Vancouver, which recorded an increase of 20.58 per cent in five years and Calgary, which saw the index rise at a rate of 18.21 per cent.

The majority of regions studied by CREA saw a five-year increase. Two areas in British Columbia, Victoria and Vancouver Island, bucked the trend and saw decreases of 3.93 per cent and 0.32 per cent, respectively.

Compared to average sale prices, the Home Price Index is seen as a clearer indication of how markets change since, unlike averages, it isn’t impacted by changes in the mix of sales activity.