Why We Expect Tighter, More Expensive Mortgage Markets

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Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

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There is a lot of chatter surrounding Canadian real estate, housing prices and mortgage rates.   Vancouver sales have started to drop but not in Ontario. Is there a housing bubble in Ontario? When will it burst?  Part of the answer might be in the next round of changes to Canada's mortgage rules. In today's podcast we talk about how this will affect your ability to obtain a new mortgage or refinance your existing mortgage.

This week's guest is Ben Rabidoux, the founder of North Cove Advisors. They're a private research firm that advises big investors like pensions and mutual funds. Ben is predicting big changes in the mortgage and real estate markets in Ontario in 2017.

What's changing?

As you remember, show #110 focused on the new mortgage rules that came into play on October 17, 2016. These new rules put in place a stress test that would reduce the amount of mortgage a homeowner could qualify for if they were applying for an insured mortgage. This applied mainly to borrowers with a high-ratio mortgage (less than 20% down) but also to those with a regular mortgage as long as they had mortgage insurance.

More rules come into play at the end of November 2016. The next set of changes will set limits on what types of mortgages can qualify for mortgage portfolio insurance, and these rules will apply even if the borrower has more than a 20% down payment. Specifically, to qualify for portfolio insurance, the  new rules will:

  • cap the maximum amortization period at 25 years,
  • limit mortgage insurance to property values below a million dollars,
  • require the borrower to have a credit score of at least 600.
  • require single unit properties to be owner occupied (in other words not investment properties)
  • pass the stress test implemented in October

There are other changes that will require banks to hold more capital, so they will have less capital available for mortgages.

These changes make the cost of lending more expensive and riskier to the lender and Ben believes they will have an impact on the Ontario mortgage and real estate markets. Lenders use portfolio insurance to reduce their risk exposure and to package mortgages to sell to other investor groups.  If they can no longer do this, it will affect their willingness to loan money and at what rate.

the banks are starting to face a lot of additional costs that they haven’t seen before particularly on the regulatory capital requirements and that is being passed on to consumers in a number of forms

What it means for you

There are a lot of moving pieces to this, but the overall takeaway is that mortgages may be more difficult to get in 2017 and may become more expensive. The same rules for new mortgages also apply to refinancing your mortgage, which a lot of people turn to in times of severe debt.

I don’t get the sense that people have thought through potentially the implication of these rule changes.

Ben's predictions for the Ontario real estate market:

  • Mortgages will be more difficult to get for many borrowers in 2017
  • The Bank of Canada may lower interest rates in 2017, but these lower rates will not translate into the mortgage market as their rates are already very low
  • Rates will likely rise in the USA due to Donald Trump being inaugurated
  • There's a strong possibility of an Ontario foreign buyer's tax in 2017

Foreign buyer’s tax in Ontario?

As Ben says it is clear to him that there is significant foreign buying in Toronto, perhaps as much as one third of the new condo market, and perhaps “high single digits” for single family homes, that are purchased but are left empty, reducing the supply of available housing.

I think it's a fair question we need to be asking … whether single family housing should be treated as a commodity by international investors or whether it should be reserved for local citizens and whether some sort of restrictions should be put on it. I think this question is going to come to the forefront again and I don’t know how the government can avoid implementing some form of a foreign buyer tax.

Ben predicts that, as happened in Vancouver, it will start with some stories in the newspaper of Canadians not being able to find affordable housing, while houses sit empty.  It will then be a “surprise, unexpected” announcement of a foreign buyers tax.

It's pretty obvious to anyone in the industry that this is happening especially in a city like Toronto where there are also legitimate supply constraints. If you add additional demand into a supply constrained market, you're going to have all sorts of effects on pricing which will need to be addressed.

Ben has no objection to foreign investment, but he believes it should be productive (investing in factories, or building new houses) and not non-productive, where perfectly good houses sit empty.

For more of our conversation with Ben Rabidoux, listen to the podcast. We've also posted the transcript below for you.

Resources Mentioned in the Show:

FULL TRANSCRIPT show 117 with Ben Rabidoux

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Doug Hoyes: We've got so much to talk about today that this show will be longer than 30 minutes so grab a coffee, sit back and enjoy. We've talked a lot here on Debt Free in 30 about the real estate market. It's still going crazy in Ontario. The bubble has not burst yet, but we may be getting closer to a top, and the top may be caused, at least in part, by changes to mortgage rules and perhaps some new taxes.

Back on podcast number 110 on October 8th we talked about the more stringent qualification rules for insured mortgages. Those new rules took effect on October 17th, 2016.

So, as a quick summary, all insured mortgage borrowers, high ratio or not, must pass a stress test. They must qualify at a higher bank of Canada qualifying interest rate. So, if you have less than a 20% down payment, federally insured banks must have mortgage insurance on your mortgage and the terms for the insurance changed on October 17th. The impact of those changes reduced the total amount of mortgage that mortgage buyers could quality for.

So, as a quick example, and of course every situation is different and this is just an example, but under the old rules you might have qualified for a mortgage on a house worth $650,000. But with the new rules you may only qualify for a house worth $500,000. That's a huge difference.

Well, guess what? There are more rule changes happening on November 30th. These new rules will set limits on what types of low ratio, that's conventional mortgages can qualify for mortgage portfolio insurance, and these rules are similar to the limits that existed for high ratio mortgages. So, some of the new rules will cap the maximum amortization period of 25 years, property values can only be insured below a million dollars, the borrower must have a credit score of at least 600. Single unit properties must be owner occupied and they'll be a similar stress test to what came into effect on October 17th.

So, what will this mean to the housing market? Well, in Canada the go to guy on anything to do with big picture economic issues is Ben Rabidoux, who was my guest back on show number 94. Ben started and runs North Cove Advisors, a macro research firm that works primarily with institutional investors around the world like mutual funds, pensions and so on. So, getting him on a show like ours is great. He looks at factors that impact the entire economy like household credit trends, interest rates and as we know from our last show he has a keen interest in real estate.

Ben's a hard guy to track down but I wanted to get him on the show before the end of November when these changes happen so I tracked him down in his car late one evening to ask him about these new changes. Now some of what we talked about gets a bit technical but the big picture is actually quite easy to understand: The changes on October 17th affected borrowers with less than a 20% down payment. The changes that happen on November 30th affect lenders and they apply even if the borrower has more than a 20% down payment.

Now before we get started let me remind you that we have a full transcript of the show over on our website at hoyes.com. I'm telling you that upfront because you will probably be tempted to want to take notes to keep track of all the different factors Ben discusses that will impact the real estate market. That's great but if you can't keep up don’t worry, every word that Ben says is on our website at hoyes.com. I asked Ben to start by giving us an easy to understand example of how these new rules will impact the mortgage market. Here's the example he gave me.

Ben Rabidoux: Let's say that a borrower comes in and they've got 30% down and they want to buy a house. So, just to use some round numbers let's say they want to buy a $500,000 house and they have $150,000 down, 30% down. By law that mortgage does not have to be insured. And so the banks can originate that mortgage and hold it on their balance sheet and basically collect the interest payment and make their profit that way.

 But what they will often do instead is they will buy aftermarket insurance for pools of these uninsured mortgages and then they will securitize it. And I don’t want to get into the mechanics of it, that gets kind of convoluted. But the idea there is they bundle a bunch of them up and then they sell them off to investors, it's kind of the bottom line. Now it’s a phenomenal provision for the banks because it assists with liquidity, it assists with a lot of leverage because those loans no longer - they no longer have to hold capital against loans that are insured. So, it's a great deal for the banks frankly.

Now what the government has said is look, we don’t know that we need to be in the business of subsidizing the banks to this extent. And so they're trying to kind of curtail some of that bulk of portfolio insurance. Now I think very quietly as we're nearing this November 30th implementation, I don’t get the sense that people have thought through potentially the implication of these rule changes. And there's a couple of big ones. So, you mentioned, okay now you can no longer include a mortgage that's over a million dollars, it needs securitization. And so at first glance you say that's not a big deal, but it is, it is potentially a very big deal.

And I'll give you an example of why that is. So, I think that the weakness in Vancouver transaction volumes are off by about a half compared to the same time last year. Big drops in volumes, so we're starting to see the first tangible signs prices have rolled over.

Now a year ago you could have 20% down and walk into your CIBC or Royal Bank branch, whatever it was and you could buy that detached house in West Vancouver for two million dollars let's say. And the bank, in the back of their mind, the bank could say “you know what? I'm a little nervous about this market; I don’t like seeing prices rise as fast as they are. I'm a little nervous about this. I'm okay with originating this mortgage because I know that down the road I can insure this and have it off my balance sheet if I want to”. And so, they would be fine originating that mortgage with the understanding that it actually bears no risk to the banks because if they want they can purchase aftermarket insurance and securitize that debt.

Now as of December 1st, that's no longer the case. So, it raises a question in my mind like what bank wants to originate a mortgage at 80% loan to value on a West Vancouver detached house? I mean if I was a lender I wouldn’t touch that. I see what's happening in this market and it's a concern of mine. I might do that mortgage at 65% loan to value, so the borrower might have to come up with a little more equity or I might ask for a higher interest rate.

But the point is it ends up being a pretty material tightening of credit. And I think you could make the case that that applies as well to some of the properties in Toronto in the detached space where the banks are clearly a little bit nervous about some of the dynamics at play with prices rising 25% year over year.

Doug Hoyes: So, there's a lot of meat there in what Ben is saying and I think it's easy to see how these changes could have a big impact on the housing market. I like his example of the big house in Vancouver but the example could apply equally in Toronto. Every area is different but there are many areas in Toronto where house prices have more than doubled over the last 10 years. So, after a 100% increase, what are the chances that prices could correct by a mere 20%? Well, it's a pretty high chance, that's a normal market fluctuation.

So, today the banks can say no problem as long as you have a 20% down payment we'll loan you the money to buy your two million dollar house, and as Ben says, there's no real risk to the bank because if they get worried, they can package that mortgage up with a bunch of other ones and get bulk portfolio insurance on it so there's no risk to the bank. If there's no risk, the bank can lend as much as they want, but with the new rules, even with a big down payment, the banks can only get insurance on a mortgage for a property with a value of one million dollars or less.

So now the bank has to really think twice before giving a mortgage on a home worth more than a million dollars because they are assuming all of the risk. If the market drops even just by a normal amount, the bank could lose money. So, as Ben says, what bank could take the risk of lending that much money when they know they can't insure it? Not many. So, that's why starting on December 1st, the banks may want even higher down payments and charge higher interest rates for their own protection.

But that's not the only change that's coming. At Hoyes Michalos we have lots of people that come in to see us who have only been able to survive over the last few years because they've been able to refinance their existing mortgages. They end up with some high interest credit card debt, but they can go to their bank and refinance or increase their mortgage to pay off their debts. Guess what? That may now be getting more difficult. Ben says that an equally big change is that….

Ben Rabidoux: …banks can no longer insure refinancing. So, the idea here is if you were three years into a five year term on your mortgage, oftentimes Canadians will break their mortgage, they'll refinance, they'll get a lower rate. They might extend the amortization and so the net result is hey, I'm going to pull $100,000 out of my house and not pay a penny more on my monthly payment.

And it was fantastic for people who wanted to augment their consumption, so they want to buy a boat or a car or go on vacation or as you know in your practice people who want to consolidate high interest credit into their mortgage. It's very easy to do because again, the lenders could purchase aftermarket insurance on that and can securitize it. So, that's going to be a little bit more challenging and I think the industry, the read that I get from speaking with folks in the industry is that mortgage refinancing is going to get significantly more expensive starting on December 1st. And that's even before we had this latest backup in rates

So, all that to say Doug, I think these changes that are set to come in to place are quite material and my sense is the media and the general public doesn’t fully appreciate it. But we'll see, we'll see where it goes. It's not hard for me to come up with scenarios where this matters a lot and it takes even more steam out of the market in Vancouver for example.

Doug Hoyes: So, Ben is saying that it's possible that mortgage refinancing is going to get significantly more expensive. So, what does this mean to mortgage lenders? If the Toronto market is hot will they still continue to lend and take that risk? My next question for Ben was in a market like Vancouver where prices have started to fall, do the banks start to lend less with these new rules?

Ben Rabidoux: If the market's hot and it looks like it's going to continue to be strong, then maybe I have no problem making that mortgage. So, maybe in Toronto where I think house prices are going to continue rising because there's not a lot of inventory and sales are strong or whatever. Maybe I'm fine making that loan on that two million dollar house. But what it does is it adds an element of additional weakness in a place like Vancouver where that market's already rolling.

So now the lenders have to go well, you know this market's already weak and if I'm going to originate this mortgage, I have to own the risk for that indefinitely. And so, what it ends up doing is they tighten their underwriting into an already weak market so it exacerbates the cycle, so I'm going to call it procyclical. It magnifies the cycle. And that's a fairly new dynamic in that space. So, look I think it can matter a lot. I don’t know the exact, you know, will it pressure demand by 10% 15? I don’t know. It really remains to be seen and a lot of it depends on the risk appetite of the lenders and how willing they are to hold those loans on balance sheets.

Doug Hoyes: So, it's so new that we don’t really know. So, back to the refinancing thing because you're absolutely right. This is something that my clients have been doing for years and years and years. I own a house, I end up for whatever reason having 40, $50,000 worth of unsecured debt, credit cards, bank loans, that sort of thing. So, I go talk to my bank or my friendly neighbourhood mortgage broker and they say hey, guess what? Your house has gone up in value so no problem you can just take out a bigger mortgage, refinance, use that money to pay off your unsecured debt.

And we're seeing this quite prevalently in the markets right outside of Toronto because of course Toronto's already shot up huge. But now we're seeing it in places like Oshawa, Stouffville, you know, Milton, places that are perhaps a little farther out. Now explain to me again why refinancing again will be potentially more difficult in the future?

Ben Rabidoux: Let's use the example of a borrower who took out a mortgage at 70% loan to value. So, it was an uninsured mortgage. If that borrower wants to get a refinance, the banks can refinance that mortgage. Let's say a year down the road they want to run it up to 80% loan to value and take out some additional money and take out some additional money to consolidate debt or whatever it might be. Yeah a year ago that's no problem, they can choose to hold that loan on balance sheets. But if for whatever reason they're nervous about that borrower, that collateral, they also have the option to roll that into a pool of mortgages and insure it and securitize it. They no longer have that option.

Now the second thing that's coming out in the new year that we haven’t talked about but there are new capital requirements coming out from the banks and in particular what they're addressing is the assumptions that the banks have around loss, given default in their mortgage books. In other words how much they might lose on a mortgage. And basically what the regulators have said is listen, so when the banks calculate how much capital they have to hold, they look at their portfolio and they ask themselves two questions:

Number one what is the probability that I see defaults in this portfolio and then number two if there are defaults what's the likelihood that I take a loss on that loan? Okay, so the function of those questions. And what the regulators have said explicitly is we're not comfortable with your assumptions around the losses that you could take. And so what we're going to do is put a floor on that. So, you can no longer assume for example in your mortgages in Vancouver that the most that you can lose is 20% because in reality house prices have run up so far and so fast that, you know, at 20% correction it can well be much worse than that. So, that's not a safe assumption.

And so, the bottom line is the banks are going to have to hold a lot more capital on these higher loan to value mortgages in places like Toronto and Vancouver. And so now the question becomes if you're a bank, do you want to refinance back up to 80% loan to value knowing that that's a very high capital intensive loan. It's a less profitable loan in a sense whereas a year ago it was a non-issue because the capital requirements were lower and you could always insure it and the capital requirements would then be zero.

Doug Hoyes: So, you're describing a double whammy, it's a double whammy.

Ben Rabidoux: Very much so. And look again, we don’t know what this is going to look like exactly. I can only tell you that the folks I speak with in the industry would say that at a minimum this is going to affect pricing. At an absolute minimum, your refinancing is going to be more expensive than your purchase mortgages. And most likely it's also going to involve a tightening of underwriting and it'll be a little more difficult to get that mortgage.

So, I don’t know, we'll see, that whole discussion is I guess a little too technical for your listeners. But I'd say the point there is simply that you can assume pretty safely that refinancing your mortgage is going to get a little more expensive, a little more challenging starting on December 1st.

Doug Hoyes: So, many different things happening here, more difficult to refinance but if banks have to have more capital and they can't be taking this off their balance sheet, that makes it doubly bad. So, okay there be more difficulty refinancing in the future.

Now the other thing that seems to be happening, so we're recording this just after the middle of November, and I believe two banks have, as we record this, increased their mortgage rates slightly. And I think it's on the long end, the five year rate has gone up .1% or something like that, which doesn’t sound like a big number, but banks have been lowering mortgage interest rates for years and years and years and now we see them starting to raise them.  Do you see this as the start of a trend or is this just a blip? What do you think is going to happen with interest rates going forward?

Ben Rabidoux: Sure. Well, I would preface this comment by saying that I was - I've been pretty consistent in my views that mortgage rates would keep going lower. And I preface that a lot on the view that the feds in the U.S take a lot longer to hike and that The Bank of Canada would in fact cut their rates before they would raise them. And I was saying that back in 2012 when everyone was forecasting the Bank of Canada would be hiking the rates.

So, I would preface this by saying I've been very bearish on rates I guess for a long time saying they're going to go lower and I have a different view on that now. I actually think that rates are bottoming right now. And there's a couple of things at play. So, one is we're seeing a back of a backup in rates out of the U.S and part of that is related to Trump and the view that he's going to unleash a lot of stimulus spending and infrastructure investment and that it'll end up being slightly inflationary for the U.S and so there's a bit of a repricing in the bond state side. And so consequently our bonds, are priced off the U.S., and we're seeing a backup in rates across the spectrum and that's affecting mortgage prices. That's one thing that's happening.

The second thing that's happening is again the banks are starting to face a lot of additional costs that they haven’t seen before particularly on the regulatory capital requirements and that is being passed on to consumers in a number of forms.

And so my view is, and I want to be clear on this, I think The Bank of Canada is going to cut again. But I don’t think you're going to see that transmitted through to fixed mortgage rates the way that it has in the past becoming so much more expensive for Canadian banks to do business and they're going to be cutting at a time when the Fed in the U.S is going to be hiking. And so, you're not going to get this net effect, you're end up with bond yields may be coming down a bit if they cut but that decrease not being passed onto the consumers.

So, that's kind of what I think. There's a slew of assumptions involved there and it's a lot of moving parts and this whole Trump phenomenon, we're all trying to understand what this all means, like I've said for a few months now, even before Trump came in, that I think this is the bottom of the mortgage rates in Canada, regardless of what The Bank of Canada does.

Now if they go into extremely unconventional monetary policy, so if you get into negative rates or if you get into quantitative easing of any size then look all bets are off. You can see mortgage rates come down. But at that point I think they only go to that policy option if the economy in Canada is so bad that it warrants that sort of dramatic response. And at that point it's probably the least of your concerns, buying a house. You're probably more concerned with keeping your job at that point.

Doug Hoyes: And what is this going to do to the Canadian dollar?

Ben Rabidoux: Well, it's certainly negative to the Canadian dollar. I mean I've been pretty bearish on the Canadian dollar for a while but I think that it could continue that trend, particularly if they are forced to cut at this point. You know, when I said I think they're going to cut again I'm not saying imminently. I think that you may see it back half of 2017, maybe. But I do think that we're going to be pushing the zero boundary from The Bank of Canada before they commence any sort of hiking cycle.

Doug Hoyes: Yeah and I'm not an economist although I play one on the podcast here but if interest rates in the U.S are going up and if there's the potential that The Bank of Canada lowers them further in Canada then presumably that strengthens the U.S dollar, makes the Canadian dollar that much weaker and that, you know, depresses our currency which makes buying stuff from the U.S, and we buy a lot of stuff, food, particularly in the winter and things like that, makes things a lot more expensive. So, there could be a number of different shocks coming in 2017.

So, you kind of eluded to Trump there very briefly and I guess what you're saying is we don’t know, we don’t really know what's going to happen. He's been making noises about, you know, building the wall, which I guess would be a fancy way of saying infrastructure spending, well you've got to borrow a lot of money to do that. And that's why you think interest rates are potentially going to go up in the U.S. Are there any other implications about him that we need to think about or is it just way too early, let's just let the guy get inaugurated first and see what he actually is going to do?

Ben Rabidoux: Well, no there's a lot of potential implications. I mean again, and the whole story on rates and there's a number of parts there to understand, but the big takeaway for your listeners is that the bond market seems to be viewing a higher likelihood of inflation and increased odds that the Fed hikes in December and then again through 2017 and that's where it's playing state side.

Now for Canada I think the most concerning thing for us is some of this kind of protectionist rhetoric, these leaked memos that suggest very early in his term he's going to start looking at renegotiating or, you know, at the worst cancelling NAFTA. And, you know, there's all sorts of unknowns around that. So, yeah I don’t know, it's far too early to know how much of that was rhetoric versus something that he plans to act on.  We’ll have to see.

Doug Hoyes: It's early days. So, final topic, all of these mortgage changes, again as a layman it looks to me like the federal government is trying to tamp down the real estate market, make it slightly more difficult to borrow, make it slightly more expensive, try to keep a lid on it. And yet there was an announcement again around the middle of November from the Ontario government saying hey, we want to do this thing where first time homebuyers get a rebate on some of their property taxes, or sorry, land transfer taxes when they purchase a house.

So, you’ve got the federal government trying to tamp things down but it looks like you've got the provincial government trying to pour gas on the fire. Am I interpreting that correctly or am I reading too much into that?

Ben Rabidoux: Well, it was a pretty token policy change that's really not going to have any real effect. I mean they doubled the rebate on the land transfer tax from $2,000 to $4,000. So, I mean you're going to go from paying $13,000 to paying $11,000 in transfer tax. When prices in Toronto are rising 50, 60, $70,000 a year and you're talking about a onetime rebate of $2,000 on your taxes, I just don’t think that's going to move the needle to be honest. So, it's one of those things where they sort of had to look like they were doing something while not really doing anything. And they kind of accomplished that.

Now look, the bigger story with the Wynne government right now is this whole question around a potential for a foreign buyer tax in Toronto. And they very much walked back that expectation that they could roll something out but I'm telling you, we saw that in Vancouver. We saw the government completely talk down expectations of that tax and say they would not put their citizens’ hard earned home equity at risk, and literally eight weeks later they rolled it out.

And what happened in the interim was you had some hard hitting investigative reports, you had some attempt from the government to quantify the effect of foreign buying. I see a lot of parallels here in Ontario. It's a potential tax that has a lot of public support. The latest poll put public support for that tax in Toronto at 75%. So, it's kind of low hanging policy fruit for the government if you will. And we're starting to see the first signs, the media is starting to do some digging around this whole foreign buyer story in Toronto.

And I don’t care who - I mean it boggles my mind that we're still having this discussion. Like I love it when the development industry comes out with a survey where they say oh well, we think it's only 4 or 5% of all sales are foreign buyers. That's exactly what they said in Vancouver. So, the question is always well, if it's not a big deal, then what are you pushing back against? Like you can't have it both ways, in the development industry you can't say oh, this isn’t affecting the real estate market but don’t bring in this tax or it'll be horrible. You can't have that both ways and that's what I'm seeing in Toronto right now.

It is clear, it is clear to me from talking to a number of industry sources and spending a lot of time on the frontlines if you will that there is a strong foreign bid. Certainly not what it was in Vancouver, there's a strong foreign bid in Toronto. And I think it's a fair question we need to be asking in terms of, you know, whether single family housing should be treated as a commodity by international investors or whether it should be reserved for local citizens and whether some sort of restrictions should be put on it. I think that that's a question that's going to come to the forefront again and I don’t know how the government can avoid implementing some form of a foreign buyer tax. So, that's going to be something else to watch.

Doug Hoyes: Do you have any sense of how many, how big a percentage of the market foreign buyers are in let's say a place like Toronto or north of Toronto up into Markham, those kind of places? Do you have any sense of that at all or is it impossible to determine?

Ben Rabidoux: It's impossible to determine. Now it's funny you mention Markham, you're getting at an important point in this and that's that this foreign bid is highly localized. It's highly geographically based. There's a lot of it in certain areas or you can go in other areas where there's none at all or very, very little.

So, you know, throwing all that in the blender I don’t know what it would be. Even before we saw any official data out of Vancouver my sense was it was always somewhere around maybe 10% of resale transactions, maybe 15% metro wide. And I think in Toronto it's less than that. I think it might be mid to high single digits for resale transactions we're talking about. In the new condo market I think it could be a third.

And you do have to get into the distinction between foreign buyers, so foreigners, versus foreign capital funding acquisitions for locals. And that's a big thing. So, you might have permanent residency status, so send your kids to UofT do their masters or whatever and they're buying two or three million dollar homes. But clearly that capital is coming from abroad but is that a foreign buyer? I don’t know that's something that the province is going to have to wrestle with. But it's clear to me that it's a material driver of this market.

Doug Hoyes: So, it makes sense to me. If I was going to implement a tax like this, I would not tell telegraph it in advance. I would in fact do exactly the opposite, oh probably not going to do it, probably not a big segment of the market, in other words exactly what was done in Vancouver, and then boom you spring it on us on Christmas Eve or whatever. Is that a possible scenario?

Ben Rabidoux: Yeah, I think that's - right, if you're going to implement something it'll come down pretty quickly. Now the point I guess I was trying to make is what we saw in Vancouver was this very rapid turn in public sentiment towards that topic. And a lot of that stems from media coverage and investigative reports and I think that's what you're going to see in Toronto as well. If you start seeing some of those big hard hitting reports from the Globe & Mail like what we saw in Vancouver, then I think that's a pretty good tell that the government's going to be backed into a corner, because it's pretty obvious, I mean really it's obvious to anyone in the industry that this is happening. And it's obvious in a city like Toronto where there are some legitimate supply constraints. It's obvious that if you add additional demand into a supply constrained market, that you're going to have all sorts of effects on pricing. And so like to me this is a no brainer.

 At the very least look at like an Australia type restriction where it's upfront. You want to invest in Canada, you want to buy homes, you want to create jobs fine, but you have to buy new homes so that you're not eliminating stock from the market. I mean that's one solution they can look at. Yeah, you create supply, you can still make the same arguments you're creating jobs etc. etc. But you're not removing those kind of low supply, single family homes in Toronto where it's really - I mean it's difficult to add more supply in the 416 and that kind of low rise segment.

So, why are we allowing what is available to be treated as a commodity by international investors? I mean it makes no sense to me. And, you know, I have nothing against foreign investment in any sense but we need to make the distinction between productive and non-productive investment. If someone wants to come here and invest in a factory and create jobs, hey knock yourself out, you're going to get no pushback from me on that.

But that's not who we're talking about, it's non-productive investment, this is I want a place to park my capital where it's not going to be - it's not going to be transmitted through the economy, it's not going to create jobs. I just want a safe place to put my money and I want to treat your houses as a commodity, that's not cool, that's just we don’t need that in a market where supply constraints are already significant and, you know, we're having a sort of pricing affect.

 So, to me you can't tighten credit for domestic buyers and leave this glaring obvious policy mistake hanging out there. You have no net effect on the market. My point is as someone who spends a lot of time out there kicking tires so to speak and trying to understand the dynamics at play in this market, it is abundantly clear to me that there's a sizable foreign bid in Toronto. You have to be wilfully blind to be out there talking to industry participants, touring along with them to - I mean you can't miss this. And so, all the media needs to do is start looking and I think that question needs to be asked if we should allow single family housing to be treated as a commodity in a supply constrained market like Toronto.

Doug Hoyes: Well, I mean what you say makes conceptual sense. Sure, let's have as much foreign money as we can, building new stuff, whether it's new factories or new homes because you're not kicking somebody out of their existing home to build a new one. But what we don’t want is foreign money driving up prices, buying condos, letting them sit empty when - which only serves to drive up prices for everybody else. And that's what a potentially a foreign buyer's tax would do. And in your mind it should be on resale housing, not new housing then?

Ben Rabidoux: Well, I don’t have a problem with it on new housing. I think it absolutely has to be on resale because again if you're talking about the city of Toronto in particular, it is difficult to bring new supply in that low rise segment of the market. And so you need to discourage any sort of speculation in that space, any speculation. I would be in favour of just broadly a speculator tax but it's clear to me that you do have a local and foreign speculation and, you know, at the very least you need to deal with the foreign speculation and try to put some limits on that, as they've done in most jurisdictions internationally. So, that to me just seems like common sense.

Doug Hoyes: So, okay to wrap it up then to look forward to the future if I may put words in your mouth you're saying that there will probably - it will probably be, either more difficult or more expensive in let's say 2017 to qualify or get a mortgage in a many different circumstances because of all these different rules.

And if we also have the Trump effect, which perhaps influences interest rates in Canada and if we perhaps have a surprise foreign buyer's tax, which I guess won't be a surprise to any of our listeners because you're sort of suggesting it's a possibility, then we could see a somewhat different or perhaps very different real estate market in 2017 in Canada. Is that a fair summary?

Ben Rabidoux: Yeah, there's a lot of ifs in that statement but that's right, if these things come to pass, yeah. Look there's still other policy changes that are out there that are probably going to come in next year as well that are also going to tighten credit. And we probably don’t have enough time to chase them down but I would say that the government - just very quickly two additional changes we didn’t discuss.

One is the government is very likely to roll out risk sharing in insured mortgage markets. So, in other words they're going to force the banks to pay a deductible. So, right now the way insurance works is the bank is covered 100% on all losses. And what they're looking to move towards is a system in which the banks are still covered but they basically pay a deductible upfront. So, that's going to have tremendous ramifications and we can talk about that in another one, in one of our other chats at some point. But watch for that to be announced early next year.

And then also watch in the next maybe six months, watch for regulators to take that same stress test that now applies to insured mortgages and apply it to everything, okay? So, even a conventional mortgage, even if the person is putting 20% down that, you know, today doesn’t have to qualify under that stress test scenario? I think that is very good chance that the regulator is going to say we want that applied to all the mortgages period.

Doug Hoyes: So, we've had a bunch of changes here in late 2016. There is more to come in 2017.

Ben Rabidoux: Yeah, I think we're going to be looking at a very different lending landscape and potentially a very different real estate market in 2017. But it remains to be seen. This is a market that has defied a lot of sceptics, myself certainly included. And the resiliency of this market, this 20 year boom, has shocked a lot of people. So who knows, who knows where this goes?

Doug Hoyes: That's my conversation with Ben Rabidoux and I think that's a great summary of everything we discussed. Who knows where this goes? There are a huge number of possible influences on the mortgage market in Canada heading into 2017. So, we know for sure it won't be business as usual.

 Ben predicts that The Bank of Canada will likely cut rates again in 2017 but it probably won't be passed through to the mortgage market because with rates as low as they are now, it's unlikely they will go any lower. So, if you're waiting for lower rates before buying a house, it's unlikely to happen.

He also predicts that we'll see a foreign homebuyers tax at some point in the future in Ontario. And he predicts that, like in Vancouver, it will be a surprise. I agree, all it will take is a few stories in the press about how foreign buyers are buying houses and not living in them, which restricts supply and drives up prices, and we may very likely see a new tax. If Ben is right and up to a third of the new condo market in Ontario is foreign buyers, a new tax could have a significant impact on future real estate prices.

That was a long show and we covered a lot of ground but I think it was worth the time because it's not often you can hear from an expert like Ben as he describes all of the inner workings of the real estate market. We think the real estate market is simple, houses go up in price, always have. But as we learned today it's not that simple. House prices are significantly impacted by changes in government rules and because the rules are so obscure and technical the general public doesn’t understand them and therefore can't determine how it will impact their lives. Forewarned is forearmed. Changes are coming, so now is the time to make sure that you're not over invested in real estate because lower prices may be coming.

And if you're one of those people who has incurred more unsecured debt, like credit cards, and then refinance their house to clean up the problem that option may not be available to you in the future. If real estate prices stop increasing, consumers may have to find other ways to deal with their other debts.

That's our show for today. We had a huge amount of content on today's show so to help you digest it all, we've prepared a full transcript of the show. You can find it at hoyes.com. Thanks for listening. Until next week, I'm Doug Hoyes. That was Debt Free in 30.