Once-hot Toronto housing hits deep freeze as lending rules bite

Bloomberg

The only thing that might be colder than Toronto in January is the Canadian city’s housing market.
While the bleak mid-winter is never the best time to sell a home in Canada, a string of open houses in the country’s largest city were chillingly empty on a recent afternoon. Tougher mortgage rules went into effect on January 1 just as higher interest rates began to bite, and the market’s on edge, waiting to see if a downturn that began last year will accelerate under the added pressure.
“Lots of people are sitting on the sidelines waiting or hoping that prices would fall,” John Pasalis, president of Toronto-based Realosophy Realty Inc., said. “I don’t expect to see a rapid increase in prices or a big turnaround this year.”
Toronto’s housing market has cooled for seven months, with prices falling and listings surging. The market has begun to buckle under a raft of measures to curb prices that were soaring at a 20 percent clip a year ago and saddling Canadians with debt, part of a global real-estate
boom that’s swept cities from Hong Kong to New York.
The latest move requires that even people with a 20 percent down payment, who don’t need mortgage insurance, prove that they can make payments at much higher rates. The so-called stress tests, which already exist for insured mortgages, will be calculated at a rate of at least 2 percentage points above the contracted rate.
And those rates are going up. The country’s central bank increased its overnight target rate three times in the past year, to 1.25 percent. The country’s big banks have followed suit, nudging mortgage rates to a four-year high.
Reality is sinking in as buyers update their pre-approved mortgages at the higher rates, Dawna Borg, a sales representative at Remax Premier Inc., said.
“They seem to feel defeated,” she said. “They feel they will fail the stress tests and they will be forced out of the market.”
Analysts at Macquarie Capital Markets Canada Ltd. say the new stress tests and mortgage-rate hikes in Canada’s environment of “hyper-leveraging” will have a more severe impact than policymakers expect. The rules alone will reduce purchasing power by as much as 17 percent, the bank said in a report. Add in the mortgage-rate increase and that number jumps to about 23 percent.
The Magnelli family is feeling the effects. Mom Loredana Magnelli has saved for a few years to help her two kids, age 30 and 26, put together down payments to purchase apartments in Toronto. Their price point of about C$300,000 ($243,000) each seemed like a viable opportunity two years ago. Now, that seems impossible.
“When you’re looking at a C$400,000 to C$450,000 mortgage and your interest rate is going to be higher, that’s huge money,” Magnelli said.