April 2022 - Monthly Newsletter & Market Update

Here is your quick summary of mortgage news since last month:

• Yesterday the Bank of Canada increased the prime rate by 0.50%. The bank prime rate is now 3.20%. The next meeting is June 1st.

• Many of you are in Variable rate mortgages and are wondering whether now is the time to lock in. The lock in rates range from 3.89% and up currently so i am recommending you stay in the variable rate mortgage and enjoy your savings and not panic and lock in. There is a significant spread between fixed and variable rates currently. If you convert to a fixed rate your rate and monthly payment will increase significantly and you will lose very valuable flexibility. A variable mortgage:

• Can be converted to a fixed rate at any time – if you convert at 3.89% today and the bond market recovers to ~2% before the end of your term, you will most likely have a large penalty to pay/may not be able to get back down to 2%. Fixed rates are not convertible.

• Penalty of only 3 months’ interest vs. a fixed rate’s Interest-rate Differential (IRD) – you can sell, refinance or renew at any time with ease in a variable rate. If you convert or take a fixed rate you’re accepting the vastly difference fixed-rate penalty calculation.

Want a more in depth analysis - read on:

The federal government released its 2022 budget last week, and it included a wide range of initiatives designed to address housing affordability. In today’s post I’ll outline the new measures and offer my take on their likely impact.

Let’s start with the three most prominent housing-related items:

1.First Home Savings Account (FHSA)

Starting in 2023, first-time home buyers will have the ability to contribute up to $40,000 to a new tax-free savings account. It combines the best feature of an RRSP (tax deductible contributions) with the best feature of a TFSA (no tax on withdrawal for a house purchase).

FHSA contributions are capped at $8,000 each year. They are tax deductible, and money that is withdrawn from the FHSA and put toward the purchase of a home will not be subject to tax and does not have to be repaid (as is the case with first-time home buyer RRSP loans, which cannot be used in combination with FHSAs).

My take: The FHSA is a definite improvement over first-time homebuyer RRSP loans because FHSA withdrawals don’t have to be repaid. But the $8,000 per year cap means that it will take until 2028 to contribute the full $40,000, and that will significantly delay any meaningful impact that it will have on housing affordability.

2. Housing Accelerator Fund

This $4 billion fund, administered by the Canada Mortgage and Housing Corporation (CMHC), will encourage municipalities to “grow housing supply faster than their historical average; increase densification; speed-up approval times; tackle NIMBYism and establish inclusionary zoning bylaws; and encourage public transit-oriented development.”

The federal government expects that this fund will lead to the creation of an additional 100,000 new housing units over the next five years.

My take: By their own estimates, the feds are forecasting that we will need 3.5 million new homes by 2031 to close the gap between our population growth, fueled in large part by planned-for record levels of immigration, and our housing stock. Its great they are trying to remove some of the "red tape" but I see little effect in the market.

2. Home Buyer's Bill of Rights

This bill includes the following items:

• A ban on blind bidding (to increase transparency during the bidding process)

My take: Could keep people from paying much more than they need to. Could really effect house prices as in some cases people were overbidding significantly.

• The legal right to conduct a home inspection

My take: Great Idea. Purchasers should have the right to do one even in a bidding war. In many cases Sellers are preemptive and have their own inspection done so purchasers can review.

• Increased transparency about the previous sale prices of properties

My take: This information is readily available already through realtors. Not sure what they will do here so that everyone has access.

• The right to know when real-estate agents are involved “in both sides of a potential sale” (known as dual agency)

My take: Dual agency is effectively banned in BC and must be disclosed in writing to both the buyer and seller in every other province except Quebec. Including this as a new “right” will give the feds the ability to take credit later for provincial policies that are already in place.

• A publicly available beneficial-ownership registry by 2025. In cases where properties are owned by a corporation, this registry would confirm which person or persons ultimately owns, controls, or benefits from that ownership (making it harder for people to use corporate vehicles as a tool for money laundering or other nefarious purposes).

My take: Great idea.

• Require lenders to offer mortgage deferrals “for up to 6 months in the event of job loss or other major life event”.

My take: This is a can of worms that I hope never sees the light of day. It will undermine credit quality, and that will lead to higher borrowing costs for everyone. Also, the definition of “a major life event” is a slippery slope. Does divorce count? What about sickness? If so, how sick do you have to be? All this complexity would lead to enormous legal bills and unnecessarily tie-up scarce resources.

• Require mortgage lenders to “act in your best interest so that you are fully informed of the full range of choices at your disposal, including the First-Time Home Buyer Incentive (FTHBI)”.

My take: The implication here is that the FTHBI was a flop because borrowers weren’t informed about it. That is laughable. It flopped because it was poorly thought out and designed with minimal industry consultation. This new “right” would ostensibly require lenders to force feed it to people.

• Stop “renovictions” by deterring unfair rent increases that fall outside of a normal change in rent.

My take: Renovictions are a big problem that needs addressing but this doesn’t seem like the answer to me. If landlords can’t recoup major renovation investments by subsequently charging higher rents, then rental housing stock will gradually deteriorate. And what is an “unfair” rent increase when major renovations have been undertaken? Subjective determinations like this introduce uncertainty and increase the potential for disputes. In the long run, that will hurt tenants and landlords alike.

Other proposed changes are as follows:

• A two-year ban on foreign purchases of non-recreational properties

• As of January 1, 2023, anyone who sells a property they’ve owned for less than 12 months will have their profits taxed as business income (with exceptions made in cases where it can be proven that the sale was tied to legitimate unforeseen circumstances.

• First-time Home Buyer’s Incentive Program to be tweaked and extended to 2025

• $4 billion to indigenous communities and $1.5 billion for affordable housing development

• Anyone re-selling a new-construction purchase agreement under assignment must pay GST/HST based on their original purchase price at the time of sale

• First-time home buyer’s tax credit doubled from $5,000 to $10,000, which increases the maximum potential rebate from $750 to $1,500

A $7,500 tax credit (up to 15% on $50,000 worth of eligible renos) to homeowners who create second suites for family members.