The federal government is hoping changes to minimum down payments required for some homes will cool hot housing markets in Vancouver and Toronto.
Finance Minister Bill Morneau announced Friday (December 11) the minimum down payment for a $500,000 home will remain at 5% but an additional 10% down payment will apply to anything beyond that.
For example, a person buying a $1-million home would be required to pay a minimum 5% down payment — or $25,000 — on the first $500,000. The homebuyer would then need to pay an additional 10% down payment — or $50,000 — on the remaining $500,000.
In this case, a $1-million home would require a $75,000 down payment instead of the current $50,000. The new regulations go into effect in February 2016.
Properties valued more than $1 million already require a minimum down payment of 20% while lenders are required to obtain mortgage insurance when the down payment is less than 20%.
The move is aimed at slowing down Canada's two hottest and most expensive markets, Vancouver and Toronto, according to CIBC economist Benjamin Tal.
“While this would have some impact, a closer look suggests that the impact will be smaller than perceived,” he wrote in note to investors.
Tal pointed out new sales of properties over the past year in the $500,000 to $1-million price range accounted for 17% of sales in Canada.
In Vancouver that ratio is 33% and in Toronto it’s 40%.
“In Toronto, the new measures are estimated to impact close to 5% of new sales while in Vancouver, the impact will be on only 2.5% of sales,” he said.
“Note that the largest impact (close to 10%) will be on Calgary (due to its relatively large share of high-ratio mortgages)—not exactly a city that needs additional cooling.”
The Bank of Canada has cut its benchmark rate twice in 2015, bringing down mortgage rates that had already been at record lows.
These low rates have brought in new buyers but the new measures stand to stymie entry into the market for some.
Tal said the government’s “asymmetrical approach” to pricing is much preferred to the “indiscriminate weapon” of higher interest rates.
“However, while it sounds dramatic, our analysis suggests that the overall impact will be felt only at the margin given the relatively small segment of the market that will be impacted—even in the target markets.”
