Millennials trying to buy their first homes face a dramatic hit to the amount they can borrow as a result of the federal government’s move to tighten mortgage qualification rules later this month.
That’s the warning from B.C. Real Estate Association chief economist Cameron Muir, who says the federal finance minister’s announcement Monday flies in the face of government efforts to improve housing affordability at the low end of the market.
“It’s going to have a dramatic impact on affordability for millennials,” Muir said. “As much as 20 per cent of their purchasing power has been eliminated. Many of them will be squeezed completely out of the marketplace.”
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Effective Oct. 17, buyers with less than a 20 per cent down payment – most first time buyers – will need enough income to qualify at a higher benchmark interest rate posted by the Bank of Canada, even though their actual payments are based on the lower rate retail banks offer them.
Right now the gap between the two rates is around two per cent, so the rule is equivalent to a sudden interest rate spike of that amount for many buyers.
Muir said a couple with combined annual income of $80,000 and a five per cent down payment can currently buy a home priced at about $500,000.
“That’s going to fall to about $400,000,” he said. “That’s a $100,000 reduction in their purchasing power. That’s a substantial hit to affordability.”
It’s the sharpest government-imposed cut to what new home buyers can afford in years, he said, predicting millennials will bear the brunt.
“Unlike previous generations, their purchasing power has now been reduced through government policy.”
Finance Minister Bill Morneau unveiled the change as one of a series of measures to reduce risk in overheated housing markets.
Muir argued the mortgage qualification rule could have been phased in gradually.
“The shock over a number of years wouldn’t be the same shock we’re now going to see in the markets.”
He said the change threatens to have broader impacts, potentially triggering a drop in home construction activity, associated jobs and economic growth.
Helmut Pastrick, chief economist for Central 1 Credit Union, said he expects some drop in sales to first time home buyers as a result.
First time buyers account for a larger proportion of sales in more affordable regions like the Fraser Valley and Okanagan – up to 35 per cent – compared to around 25 per cent near Vancouver.
Unlike the foreign buyer tax B.C. has imposed only in Metro Vancouver, Pastrick said the federal mortgage qualification change is “indiscriminate” and applies everywhere, even where overheated real estate has not been a problem.
“It will ripple out beyond the first-time home buyer market,” Pastrick said, adding existing owners seeking to sell or downsize are often dependent on a first-time buyer purchasing their home.
Pastrick is in the process of scaling down Central 1’s forecasts for real estate market and B.C. economic growth for 2017 as a result of the mortgage rule change.
He expects a five per cent decline in benchmark home prices over the next six to nine months, coupled with lower sales.
But Pastrick predicts the real estate market will stabilize over time, not collapse.
“Markets will adjust –this is not the beginning of the end of the cycle,” he said, citing the strong trends of growth for B.C.’s economy, jobs and population.