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Luxury Homes Starting to Feel Pinch of Mortgage Rules

4 October 2012

When changes were made once again to mortgages in Ottawa this past July, newspapers and the blogosphere were abuzz about the impact this would have on first-time homebuyers. They wouldn’t be able to afford the 25 year amortization period that now comes with insured mortgages, and at a time when prices were climbing ever-higher. And yes, entry-level homebuyers have definitely been the ones to feel the most repercussions so far about the mortgage rules. But there’s another demographic that is now feeling the effect of those rules, too. That’s those looking to buy or sell luxury homes.

One of the new mortgage rules states that homes valued over $1 million are no longer eligible for mortgage insurance. At the time the rules were announced, everyone thought this made the most sense. People who can afford to live in that type of luxury should be able to do so without a lot of help – especially if that help has to come in the form of insurance that is about to hit its ceiling, and that could be used to help other homeowners and homebuyers. But, the tighter rules could actually be having a bigger impact on this segment than it was first originally thought it would.

The effect the new rules have had on luxury homes can be seen most prominently in Vancouver right now. Just last month in Vancouver there were only 1,516 residential properties (of all types) that were sold. That’s a drop of almost 33 per cent from August of last year. And luxury homes? In September of 2011 there were a total of 71 luxury homes in the British Properties area that sold. September of 2012 though, only saw 43 of those snatched up by new owners.

This lack of activity is also coming at a time when prices are sinking. But this doesn’t seem to be helping out with the unloading of luxury homes very much. In the west side of Vancouver, where most of the high-end homes are located, prices dropped to $2.09 million in September 2012; that’s a 6.5 per cent drop from September of last year. Other single detached homes in the city are now following in on the price index at $935,600. Although that’s a slight drop of 0.5 per cent from last year, if they climb much higher nearly every home in Vancouver will be slapped with the new mortgage insurance rule.

“The rule changes are affecting the entire housing market,” says Sal Guatieri, senior economist at Bank of Montreal. “High end, low end, mid-range.”

Patricia Mohr, vice president of economics at Scotiabank, agrees. But she doesn’t think it’s all on the part of the buyers – she thinks that sellers have pulled out of the market, too, because of the new rules.

“The gap has widened between what buyers are willing to buy at and what sellers would like to sell at, so the transactions are slowing because of that,” she says. “Some potential sellers may hold off because they feel it’s not a good time to be selling.”

But not everyone is of the same mind when it comes to pricey real estate in Vancouver. Cameron Muir, chief economist at the B.C. Real Estate Association, says that it’s just the expected cooling that we’re seeing; and that the tighter rules have nothing to do with it.

“It’s a short-term lull in the market,” he says. “It’s a case of prices on the west side of Vancouver coming back down to earth after having a phenomenal year in 2011.”

Given Vancouver’s’ precarious circumstances right now, and the fact that the mortgage rules aren’t going away any time soon, and it’s hard to agree with Mr. Muir about the short-term lull.

What do you think? Are prices in Vancouver really just correcting themselves? Or are the tighter rules having an even bigger impact than we thought they would? Let us know by commenting in the section below, or liking us on Facebook!

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