Two significant developments in September will have a lasting positive impact on Canadian housing activity. First were Ottawa’s measures to make housing more affordable. Second was the Fed’s 50 basis point rate cut.
Ottawa has come under increasing pressure to reduce immigration, build more housing, and help first-time homebuyers afford to buy a home. In response, the federal government increased the home price cap for insured mortgages from $1 million to $1.5 million. This is the first time the home value limit has been raised since 2012.
This will allow many more home purchasers to buy with a smaller down payment (10% rather than 20%) and 30-year amortizations (up from 25 years for non-insured mortgages).
- A $1.5 million home will now require a $125,000 down payment (8.33%). That's less than half the current $300,000 required ante (assuming the feds keep the minimum down payment tiers the same)
- The maximum insurance premium on a $1.5 million purchase with 30-year amortization will now be $57,750 (again, assuming 10% down on any purchase price portion over $500,000).
This will significantly impact high-cost real estate markets such as Vancouver and Toronto, where the selling prices average $1.1 million in Toronto and $1.2 million in Vancouver. In addition, all insured new-build buyers can get 30-year amortizations, not just first-time buyers.
With mortgage rates falling rapidly, these measures will accelerate the growth in housing demand.
Also, the good news was the Federal Reserve’s 50 basis point rate cut, the first such cut in this cycle. Fifty is double the usual policy change increment. Such moves are typically reserved for emergency Fed meetings or clear and present liquidity threats. This opens the door for the Bank of Canada to have a super-sized rate cut in October or December. This bodes well for building home sales going into the all-important spring season.
Inflation has fallen considerably, and the Canadian unemployment rate has risen sharply. While retail sales for July showed a considerable rebound, it was mainly because of a surge in car sales. Nonetheless, spending growth pales in comparison to the population surge.
