Buying Frenzy Ahead Of New Mortgage Rules

The divergent pattern between freehold and condominium properties that began in the spring has persisted since then and seems likely to continue into next year. Accordingly, I will continue to report price trends separately for these two categories, as they tell two completely different stories about the market.

The freehold market (mainly detached homes) underwent a massive upward spike in prices in February through April, gave back all of these gains over the next four months, and has been tracking more or less in line with last year’s prices ever since (see the chart below). In November, freehold prices were actually 6% lower than last November, however, this gap may close in December because of the new mortgage rules coming into effect in January.

The new rules will require all buyers to pass a ‘stress test’ in order to qualify for a mortgage. This stress test involves qualifying at a mortgage rate 2% higher than the actual rate, or at the Bank of Canada’s ‘mortgage qualifying rate’, whichever is higher. Up until now, this stress test was required only for buyers who needed mortgage insurance (less than 20% down payment); as of January 1 it will apply to all buyers no matter how large the down payment. For the typical buyer, this will mean an approximate 20% reduction in what he can afford. As a result, there will likely be a bit of a buying frenzy between now and year-end as buyers try to get under the wire and qualify under the current rules.

This extra buying in December will probably pull a certain amount of selling volume forward from next spring. This will compound the effect of the reduced affordability, and so the market could be somewhat subdued in the early months of next year. Combined with this spring’s ‘mini-bubble’, we will almost certainly see a significant year-over-year drop in prices from January through April, 2018.



The condominium apartment market is a different story, as the chart below shows. As for freehold properties, condo prices ramped up quickly in the early months of 2017 but, although prices did sag  a bit after April, they remained much higher than last year and are still up 17% year-over-year. It remains to be seen how the new mortgage rules will effect the condo sector, but one might speculate that, since condo buyers are more likely to be first time buyers with less than 20% down payment (and therefore already subject to the new  mortgage rules), the impact will be significantly less than on freehold properties. If so, the ‘trend gap’ between condo and freehold properties could widen further next year.



The inventory of homes for sale has fallen for the past couple of months, and was at just over 2 months’ supply in November (see the chart below). This supports the theory that there is ‘extra buying’ going on in front of the new mortgage rules. It is interesting that prices for freehold properties are not increasing along with the declining inventory and, in fact, have fallen slightly for the past two months. This suggests that the market has already been weakening naturally and that the new mortgage rules may deliver more of a wallop than the politicians anticipate. Time will tell.