Different governments at the federal and provincial levels have introduced multiple policies to address housing affordability, but every new rule seems to only make things more expensive. Let’s quickly highlight some of the rules that have come into play over the last 20 years:
- A 40-year mortgage amortization period (later rescinded)
- Zero percent down payment mortgages (later rescinded)
- Home Buyers’ Plan limit increased to $35,000
- Canada Mortgage and Housing Corporation (CMHC) debt limits increased
- First-Time Home Buyer Incentive introduced
- Mandatory affordable housing in some projects
Technically speaking, many of these rules made housing “more affordable” since more buyers were able to enter the market. However, with more buyers, there’s more competition, so that just increased prices further.
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Reduce amortization periods
Currently, CMHC insured mortgages have a maximum amortization period of 25 years. This means that homeowners have 25 years to pay off their mortgage.
If you have a down payment of at least 20 per cent, you can get an amortization period of 30 years.
Let’s say you’re trying to buy a home that costs $800,000, and you have a 10 per cent down payment. If you were to secure a mortgage at four per cent with a 25-year amortization period, your monthly payment would be $3,787.35.
What happens if that mortgage term is reduced? With a shorter amortization period, your monthly carrying costs go up.
For a 20-year amortization period, the payment increases to $4,350.57. A $563 monthly difference would greatly affect how much you can borrow.
This drastic change would immediately price people out of the market and force others to take on smaller mortgages. However, it could be a benefit in the long run as there would be less demand, which would hopefully reduce prices.
Mortgage application verification from a third-party
Let’s be honest. There’s a lot of mortgage fraud out there. Some mortgage brokers will push through your application with false documents as long as you pay them a fee. They might even loan you the funds to meet the mortgage requirements, which you would then immediately pay back to them once you secure your lending. While this may or may not happen often, it’s clearly a problem. It allows people to qualify for a mortgage when they wouldn’t under traditional methods.
What if there was a rule where every mortgage application had to be verified through a non-biased, third-party company? The cost of this service would be charged back to the financial institution providing the mortgage. Doing this would mean less fraud, and lenders would only be approving clients that can actually afford their payments.
I’m not suggesting that there are a lot of corrupt mortgage brokers out there. But despite what financial institutions say, there’s clearly a problem with mortgage fraud. Lenders would hate this idea as it would increase their costs and real estate boards would strongly be opposed too since it could potentially lower how many people can afford to buy a home.
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Increase minimum down payments
Currently, the minimum down payment for a CMHC-insured mortgage is five per cent, while uninsured mortgages require 20 per cent. What if we raised that to 15 per cent for insured mortgages, and 30 per cent for uninsured?
As soon as you increase the down payment requirement, many potential buyers will be priced out. While that may seem unfair, it’ll reduce the demand for housing. With fewer buyers available, prices would naturally drop. Of course, this assumes supply stays the same.
Anyone who’s just starting to save their down payment would likely be strongly opposed to this, but this is another example of short-term pain leading to long-term gain.
Increase taxes on additional properties
Currently, capital gains on investment properties are taxed at 50 per cent. This is no different than other investments you hold. However, to reduce housing costs, how about increasing the capital gains tax on investment properties to 75 per cent or even 100 per cent. With this increased tax rate, people would likely be less interested in owning an investment property.
What if an investment property you sold increased in value by $100,000? Under the current system, 50 per cent of your gain ($50,000) would be added to your income and taxed at your marginal tax rate. Under my suggestion, $75,000, or the entire $100,000 profit, would be taxed.
Or what about increasing property taxes on a sliding scale for each additional property you own? For example, if you own two properties, your property taxes double. When you own three, your taxes triple. These rules would lower the demand for investment properties and leave more inventory available for end users.
It would be great for people who just want to own a home for themselves, but investors and realtors would be up in arms as their profit margins would drop.
No more blind bidding
The current system where you bid blindly on real estate is broken. None of the bidders know what numbers they are competing against, forcing them to bid higher in the hopes of securing a home. This system needs to be changed immediately.
If every potential buyer knew what the current bids were, they could just offer their maximum. If someone else decides to bid more, then it wasn’t meant to be. No potential buyer would be disappointed knowing they went in with their maximum offer, but someone bid higher. The seller still gets the top dollar for their home. It’s a win-win, right?
Starting in 2023, home sellers will have the option to reveal bid prices. However, since it’s not mandatory to disclose the prices, sellers will likely continue to keep bids a secret.
Some people that work in real estate argue that getting rid of blind bidding is not suitable for privacy reasons. However, the end of blind bidding would only reveal the numbers for the bids. Personal details such as the bidders’ names would not be disclosed.
Something needs to be done
As long as politicians are more concerned about winning elections and individuals working in real estate are focused on profits, housing affordability will always be an issue.
Rising interest rates may slow down demand, but prices are already at all-time highs. Any future rate hikes will be slow, and in any case, mortgage borrowers are required to pass the “stress test” that ensures they can handle rate hikes of up to two percentage points.
None of the currently proposed solutions appear to be effective. Something drastic needs to happen. If we do nothing, potential homebuyers will continue to struggle.
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