New federal policies could cut home purchasing power by up to 20%: BCREA

The rules will further erode home affordability, the association said

Changes to federal policy around mortgage applications could disqualify some buyers from mortgages for which they would have previously qualified, according to the BCREA | Shutterstock

New mortgage rules introduced this week by the federal government cut first-time homebuyers’ purchasing power by up to 20%, exacerbating affordability issues, according to a new report from the British Columbia Real Estate Association.

One of the changes announced October 3 was to make it necessary for all homebuyers looking to secure a high-ratio mortgage to qualify at the five-year benchmark interest rate, even if they have been able to secure a lower rate with their lenders. Currently, if they are able to secure a five-year or longer fixed term, they only need to qualify at their discounted rate.

The result is a drop in affordability, which will particularly hurt those who are looking to buy a home for the first time.

“Housing demand will slow as millennials, other first-time and early move-up buyers are squeezed out of the market,” the BCREA said in a release. “This reduction in demand may cause imbalances and declining prices across some product types in some communities.

“In addition, new home construction activity will lag along with related employment and economic growth.”

According to the BCREA, a family with a combined income of $80,000 will now only qualify for a mortgage of $405,000, assuming a 5% downpayment. Previously, it would have been able to obtain a $505,000 mortgage, so the policy change will mean a drop in purchasing power of $100,000 for this family. In a tight market such as Metro Vancouver’s, this could mean this family is priced out of the market even for a condo, as the benchmark price for this property type was over $500,000 in September. This could affect many families in the region; according to Statistics Canada, the average family income in Vancouver was $76,040 in 2014.

In another example, a family earning $120,000 will be able to qualify for a mortgage of $651,000 – down $152,000 from $803,000 prior to the policy change. This is assuming a 10% downpayment. This could price the family out of being able to afford a townhome, as the benchmark price for these homes was $677,000 in September.

The BCREA said demand is likely to intensify, which will lead to rising prices in the future, “as financially retrenched millennials buy up an undersupplied housing stock.”