The unprecedented times of COVID-19 have brought about uncertainty and unpredictability in most industries around the globe, with the Canadian real estate sector being no exception.
While first time house hunting millennials were anticipating a silver lining in COVID-19’s economic rampage shot at the real estate market, experts have advised that first time buyers should procrastinate with making a house purchase but rather educate themselves on the new stricter mortgage regulations and the impact of being new homeowners in an economic downturn.
Before COVID-19 was declared a pandemic by the World Health Organization on March 11, the market was set to soar at the start of the year. According to the Canadian Real Estate Association, February 2020 saw year-over-year sales increase by 27% nationwide, suggesting a similar trend throughout the year. Major cities such as Toronto’s and Vancouver’s sales escalated by 45.6% and 44.9% year-over-year, respectively.
And then COVID-19 hit!
Within one month the entire industry plummeted, citing a 57% decrease in national average sales in May. On a year-over-year basis, home prices have stalled, with the average price rising only about $1 000 in April which was down approximately $90,000 from February’s average price of $910,319, according to reports from the Association.
While it’s not all doom and gloom, this month sees an imminent “quicker-than-expected recovery in sales,” as reported by RBC’s latest monthly housing market update.
Broker and Real Estate agent, Christina Leung, said that although interest rates are at an all-time low, and the buyer has stronger negotiation power, the rigmarole of these extraordinary times has manifested some key changes, especially for first time buyers to take note of.
“It is imperative to take this time to rather understand comprehensively the changes in the market in order to be safe than sorry.”
A major development during the economic shutdown by Canada’s Mortgage and Housing Corporation (CMHC), will establish much stricter mortgage qualifications for high-risk borrowers or those who offer down payments of less than 20%.
The state-owned Corporation, which offers default insurance, announced in June that buyers will need higher credit scores and lower debt burdens to qualify for a mortgage.
According CMHC’s website the new regulations, which came into effective as of July 1, will include:
- A minimum credit score of 680 for at least one borrower compared the previous credit score of 600.
- Eliminate borrowed down payments.
- Limiting Gross Debt Service (GDS) ratios to 35% (from 39%).
- Limiting Total Debt Service (TDS) ratios to 42% (from 44%).
Leung added that CMHC’s new debt-ratio policy will cut homebuyers’ purchase power by up to 11%. “For example, a first-time buyer earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules. That’s like jacking up the minimum stress test rate from 4.94% previously to 6.30%.”
Despite stricter mortgage regulations, first time buyers can take advantage of several incentives including:
- The First-Time Home Buyer Incentive by the government offers eligible buyers up to 10% of a home’s purchase price to put toward their down payment, thus lowering mortgage cost on a shared-equity mortgage with the government. As a result, the government shares in both the upside and downside of the property value.
- Depending on the location, a no land transfer tax will apply to qualifying first‑time purchasers on the first $368,000 of the value of their home. First‑time purchasers of homes greater than $368,000 would receive a maximum refund of $4,000.
With unemployment rate at an all time high and job security a worrying factor, Leung added that “at the end of the day it all depend on the person’s personal circumstances and if one could afford to purchase a home without risk, they should consider it.”
Veruschka Mungroo | Contributing Writer