Tony Wong – Toronto Star

Frank Lee is looking to buy a condominium in Toronto as an investment. He’s hoping to purchase something downtown and close to the subway. But his $300,000 budget means many first-time buyers and other investors are looking at the same properties.

“The market is tight in terms of product, because the interest rates are so low, everyone is looking,” Lee said. “You see people out there who are leveraged up to their eyeballs.”

On Tuesday, federal Finance Minister Jim Flaherty introduced tighter mortgage rules in Canada to slow the heated housing market before it becomes a bubble. Real estate industry insiders generally applauded the moves that will make it harder for investors to speculate in real estate while beefing up financing requirements for borrowers.

“The changes reflect reasonable public policy,” said Phil Soper, president and CEO of Royal LePage. “Our government has taken the opposite tack to what has happened in the United States, where they have tried to attract the maximum number of people to make financial commitments regardless of ability to pay.”

Jim Wong, a veteran mortgage broker with the Royal Bank of Canada, said he typically counsels borrowers to make sure they can afford a bigger mortgage down the road, in case interest rates go up.

“Circumstances can change, so you have to be prepared for the worst, and that you have some kind of cushion,” said Wong.

Realtors say a rule requiring investors to make bigger down payments will likely have an immediate impact on the Toronto real estate market, as it forces some speculators out.

The Toronto condominium market has been particularly vulnerable to buyers trying to make a quick buck. Estimates range as high as 40% as the number of suites sold in some downtown buildings to investors.

Comment: Remember, that is only an estimate. And we do not know whose estimate it is.

“Speculators want to put as little down as possible, so this will hurt,” said RBC’s Wong. “They might put 5% down and try to flip it. This is aimed at the guy who is buying three or four units at a time.”

Lee, an investor who works in the financial services industry, is looking for a longer-term investment he can rent. He welcomes the new rules because he believes they will sideline marginal players, allowing solid investors to come to the fore with less competition.

“You have a lot of investors out there who are leveraging, but they’re not doing it wisely,” Lee said. “You also have some people using their homes like it’s a piggy bank, and none of that is good for the market.”

Jim Ritchie, senior vice-president of condo developer Tridel, said his company typically requires 15% down on new units with another 10% on possession.

“We’re not crazy about people overextending themselves, we want our customers to be able to close on our properties,” said Ritchie.

Natalie Gierman, a researcher and policy analyst at a Toronto non-profit, said she has been saving for a home for two years.

Like Lee, she is looking for something downtown for about $300,000. But so far it has been a frustrating search because of so many competing buyers in the market.

“There is nothing out there, and everything affordable gets snapped up,” she said.

The first-time buyer also suffered sticker shock when she realized the $300,000 properties she was looking at ranged in size from minuscule to small, at 400 to 600 square feet. Cheap money fuelled by low interest rates has kept home prices buoyant.

Gierman, who describes herself as a conservative purchaser, said she will likely take a five-year fixed rate at 3.79%, though she could take a variable rate at 2%.

“There is a real temptation in North America for some people to stretch themselves, so the new rules are a good thing,” said Darren Ford of Keller Williams Real Estate.

Ford said he expects that the new rules will affect his sales in the short run.

“As a realtor I would prefer stability. I didn’t make as much money last year, but I was still able to make a living. That’s preferable to having the ups and downs.”

Gregory Klump, chief economist at the Canadian Real Estate Association, said the rules will have a “marginal” impact on home sales.

“We are pleased the government did not overreact,” said Klump. Ottawa had been rumoured to be considering bumping up down payment requirements for all borrowers and reducing amortization rates.

“That would have had a deep and damaging impact, especially when our forecasts are calling for a slower market in the second half of this year and a decrease in sales next year.”

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Contact Laurin Jeffrey for more information  –  416-388-1960

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