Condos, both of the resale and pre-construction variety, have always been the most financially-feasible entry point into the housing market. However, with new affordability-limiting mortgage rules now in place, this least expensive home type is now flying off the proverbial shelf – a trend that experts say is here for the long term.
What are these new mortgage rules?
On January 1st, a new set of mortgage loan qualifications was put into effect by the federal banking regulator. Dubbed Guideline B-20, they require all borrowers of new mortgages to pass an affordability stress test, meaning they must prove they can continue to carry their mortgage payments should interest rates rise. This benchmark- which is set by the Bank of Canada and based on the average of the five-year fixed posted rates from Canada’s Big Five banks – is currently 5.14 per cent. Borrowers must prove they can qualify for this rate, or their mortgage contract rate plus 2 per cent – whichever is higher.
Calculations find B-20 will reduce the maximum borrowing amount for buyers by roughly 20 per cent. In the Toronto or Vancouver markets, where detached homes routinely go for over $1 million, that margin can mean the difference between homeownership and renting.
Further compounding affordability challenges is the Ontario Fair Housing Plan, introduced by the provincial government in April 2017. The impact of these combined changes has sent many would-be buyers back to the savings drawing board.
Condos to lead market in price growth
For buyers determined to break into the market, though, adjusting to B-20 means reducing expectations, shifting focus from low-rise housing to condos. Pre-construction units, which often come to market priced below their resale counterparts, have also become an increasingly viable option for these priced-out borrowers.
As a result, the condo segment has led price growth throughout the Greater Golden Horseshoe region over the past six months, even as the market has softened as a whole from its March peak.
Numbers from the Toronto Real Estate Board show detached home sales have plunged 63 per cent in the GTA between March 2017 and February 2018, from 12,077 units to 9,178. Prices for houses for sale in Toronto have also dropped dramatically by 17.5 per cent, to an average of $1,000,736 – a loss of $213,686.
While sales for Toronto condos are also down a considerable 49.9 per cent throughout the region, prices have stayed relatively flat-to-positive, up 2.1 per cent to an average of $529,782.
“As we move further into the spring and summer months, growth in sales and selling prices is expected to pick up relative to last year,” said TREB Director of Market Analysis Jason Mercer. “Expect stronger price growth to continue in the comparatively more affordable townhouse and condominium apartment segments.”
Multi-family housing account for most new build sales
In the new-build market, multi-family housing accounted for a whopping 70.8 per cent of all sales in January, according to the Building Industry and Land Development Association (BILD), with 886 condo apartments in low, medium, and high rise buildings sold.
Brand new detached houses, however, only made up 30 per cent, with just 365 sold. However, while affordability remains an issue – the average price for a freshly-built single-family home rose 19.6 per cent to $1,299,454, compared to $714,430 for new condos – tight restrictions on supply are contributing greatly to lower sales numbers, says BILD President and CEO David Wilkes.
“The January data continue a trend we have seen in the GTA. Our industry wants to meet consumer demand in terms of the mix and type of houses available, but we are constrained by government policy,” he said. “Affordability and the lack of supply of single-family housing remain a challenge.
Written by Penelope Graham. This is a guest post by Zoocasa.