Anyone who watched the news on the fallout of the American housing market, less than a decade ago, knows that there is no such thing as a sure investment. This is especially true when it comes to the housing market. The red hot rate at which the Canadian housing market is on the rise is making many anxious. Seeing red flags that a bubble is about to burst, economists are trying to stop the sins of their American cohorts before the disaster repeats itself abroad.
The biggest problems that the average Canadian real estate buyers are experiencing include not only the rising price of homes, but the limited inventory available for sale. Even if you’re able to find a home, twenty bidders are vying for it, which drives the prices up beyond what’s reasonable. This puts home buyers in a risky situation.
Economists and real estate forecasters are seeing the potential that a bubble may be lurking and is likely to burst soon, leaving many home buyers with very little equity. It is also posing a threat to the economy as a whole, and a housing bubble could have a severe impact on everyone from homeowners to small business owners.
In an attempt to reign things in, the Canadian government is taking steps to make it more difficult for foreign investors to buy land at an increasing rate. By imposing a 15% tax hike on foreign investments in real estate, they are starting to see that risky mortgage loans could be the downfall of both the average Canadian, and the traditional banking institutions across Canada.
To try to slow the market down and bring it back into the realm of the realistic, the government has proposed guideline changes to the rules governing the way that banking institutions can go about lending. These lending practice changes are threefold and, hopefully, will help to protect buyers and lenders equally. The buyers being targeted by the proposed changes are those that are purchasing a home that is $500,000 or more.
If you are going to take out a loan for a $500,000+ home, it is now required that you have as much as ten percent to put down on the loan. That is to ensure that buyers have some “skin” in the game. Before, if a loan fell through, the buyers pretty much had no responsibility, and the lending institutions were left holding the bag.
Proposed foreign tax rate hikes
Another change is that there will be a penalty tax imposed on foreign investors. Although metropolitan housing prices continue to rise, they are still below other industrialized nations. That makes them an excellent way target for foreign investors to get in on potential windfall earnings. Not only are foreign investors going to be subject to a 15% tax penalty, areas like Vancouver are considering raising the tax rates for foreign-owned homes.
The biggest con to proposed changes is finding those who are investing from abroad under the guise of having a Canadian relative or friend, and distinguishing them from those who are really willing to relocate to Canada. There is a suspicion that foreign investors may be buying houses for sale in Winnipeg, by using Canadian citizens as fronts. But going through all the paperwork to find offenders may take a lot of time and resources, which simply aren’t available.
Considering increasing the interest rates
There is talk about increasing the interest rates for residential real estate lending to slow down the rate of home buying. Many economists believe that the interest rates have been kept artificially low, which has only further increased real estate prices. Keeping interest rates low is putting potential buyers at risk of taking out loans they can’t afford to repay.
Move the housing out of the metropolitan areas
There is no doubt that housing density issues are a problem in Toronto and Vancouver. Many government officials are pushing to make transportation more accessible to those who live outside the boundaries of the city. Using mass transportation will not only stop the huge rise in housing costs, but it will also give home buyers better options at a lower price, so they aren’t financing themselves past the point where they can realistically afford it.
The red-hot market in Canada may not be red-hot that much longer. What is for sure is that if there aren’t steps taken, the bubble will continue to inflate, and there is no way to keep a bubble from an eventual burst. The government hopes that by making incrementally small changes, they can help to slow down the market increase for the Canadian housing market before something disastrous happens.