Ottawa has enacted mortgage rules that are a bitter pill for new prospective homeowners to swallow, but they are a very clever way to try to cool the nation’s housing market and keep many from sinking under the weight of too much debt.

The changes require those making down payments of 20 per cent or less to qualify for a mortgage at a higher standard than the rate that the bank is offering. Ottawa’s new lending regimen requires lenders to apply a stress test to the application to see if they have income to support the mortgage as if it were based on the bank’s posted rate (currently 4.64 per cent). Banks routinely offer mortgages at half their posted rates and until now qualifying for what the bank was actually offering was enough. This change effectively reduces how much one can borrow. Since rising interest rates are the real risk to the housing market the government has found a way to program a “what if they go up?” threshold into lending practices.

The federal government has tinkered with the rules around mortgages six times since 2008 and have thus far been unable to get the genie back in the bottle. This latest stress test may do it without causing the bubble to collapse. Low rates have largely driven this situation, so striking at the source of the problem is wise. This may bring the market down to earth, or at least to point where a Toronto house price can be viewed from terra firma.

Toronto has seen year-over-year gains in the average value for a detached home — currently $1.3 million — increase by 20 per cent in just 12 months. At $1.58 million, the average value in Greater Vancouver is higher, but its market has begun to cool due in some measure to the introduction of a province-wide foreign buyers tax. There is some evidence that the Chinese investors are migrating to Toronto to skirt levies on British Columbia purchases: year-over-year sales (not values but number of properties) fell 26 per cent in Vancouver, but rose 23.1 per cent in Toronto.

The Canada Revenue Agency also has a hand in the federal plan to cool the housing market. The actions of speculators have contributed to the inflation of the housing market bubble without the consequence of needing to pay capital gains taxes on their profit. They achieve this by making a declaration that the house they are “flipping” is their principal residence. To date, that declaration needed only be made to oneself on a form to be kept in one’s own records. Now, according to the announcement, all real estate property transactions must be declared on the annual tax return on Form 3, including those involving principal residences, and failing to do so will void the capital gains tax exemption.

Many of these changes have a direct impact on Canada Mortgage Housing Corporation (CMHC) insured loans. The CMHC loans are for mortgages for houses purchased at a value less than $1 million and with down payments of less than 20 per cent. Arguably this has less and less to do with Toronto prices and is not at all relevant to the Annex, where values are much higher. But one must bear in mind the “trickle-up effect” described by local realtor Louis Adams, “the guy trying to sell his $800,000 property now has a smaller pool of possible purchasers and his chances of buying into [and inflating] the $1 million plus market are thereby diminished”.

Only time will tell if the federal government has got the medicine right for the market this time. Since real estate is the only thing churning the economy at present, it’s important not to kill the patient with the cure.

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