Globe and Mail
Wednesday, Feb. 17, 2010
Bruce Johnstone can spot them the minute they start talking – real estate speculators who are only interested in flipping a property at the first sign of a capital gain.
As a broker at Keller Williams Ottawa Realty Ltd., Mr. Johnstone deals every day with well-heeled investors looking to sink some of their cash into real estate. Right now, there are so few residential properties available in the city that he has a dozen investors on a waiting list, each hoping to buy small apartment buildings.
Investors say all the right things as they sit across from him; they were burned by the stock market and want to put their money into something long-term that will also churn out some cash. Speculators make their intentions equally clear; they prefer to buy with as little money down as possible, and pay scant attention to pesky details such as the state of the ductwork and vacancy rates.
“They just want to get as much leverage out of their money as they can,” Mr. Johnstone said.
Whether they are called investors or speculators, such buyers are a key target of the federal government's reforms to the mortgage market.
Ottawa's decision to increase the minimum down payment required to obtain Canada Mortgage and Housing Corp. insurance on investment homes to 20 per cent, from just 5 per cent, will have a sizable impact, said Craig Alexander, deputy chief economist of Toronto-Dominion Bank, because these properties account for up to 15 per cent of all new mortgages.
“Raising the requisite down payment could be a significant deterrent to making the investment,” he wrote in a report. “The actions announced by the government for non-owner-occupied dwellings significantly reduce the risk of speculation driving the market forward.”
Finance Department officials explained that the change won't apply to borrowers who buy principal residences that also include some rental units.
“This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable levels which does not serve Canadian home buyers,” Finance Minister Jim Flaherty said.
The measure, one of three new rules introduced by the government, is likely to have an immediate effect, said Royal LePage chief executive officer Phil Soper.
“That will take a significant number of transactions out of play and I don't think that's a bad thing,” he said.
“There definitely will be some in my industry who are not happy with the change, because deals that made sense yesterday won't make sense today. People will need to find more money to get their foot in the door, and many will choose just to keep that cash in their pocket.”
Canada Mortgage and Housing Corp. offers mortgage loan insurance on various types of real estate, including duplexes, condominiums, owner-occupied properties, manufactured homes and properties requiring renovations. The insurance protects the lending institutions from defaults, and ensures cheaper financing for the consumer.
At the same time, Mr. Flaherty acknowledged that even though most lenders already ask mortgage-seekers if they plan to live in the home they're trying to buy, they're not always sure they get an accurate response. The new rule is “not easy to administer but it's not impossible either,” he said.
This has some suggesting in the industry suggesting CMHC should get out of insuring investment properties altogether.
“CMHC isn't in the business of helping businesses prosper through investing in real estate,” said Mr. Soper.
“Their goal is to help Canadians own a principal residence. Their role should be muted, and so it seems rational to make these changes.”