Vancouver has already passed this high water mark, but now it’s Toronto’s turn to experience the $1 million home as the new norm – a property that comes with so much debt even the federal government seems scared of it.
Rising Ontario prices created a drag on the national figure for home-ownership affordability, according to a report from the Royal Bank of Canada, which says strong data from Vancouver could impact those numbers even more.
New statistics from the Toronto Real Estate Board released Wednesday show the average price of a detached home in the city reached $1,040,018 in February, the first time prices have crossed over the seven-figure threshold in any housing category.
Those buyers face a three-year-old rule that Ottawa imposed to cool the market, which bans any sort of government backing on homes worth more than $1 million.
As prices rise, some wonder whether insurers like Canada Mortgage and Housing Corp., the Crown corporation that backs bank loans, may have to revisit that threshold.
“Will it encourage insurers to benchmark or index their maximum home price?” asks Rob McLister, the founder of ratespy.com. “Now, a $1 million is an average house so you are basically saying [the government] is not going to insure an average house.”
Mr. McLister says once you get into $1 million plus, your choices of who you can borrow from change dramatically.
“A lot of people think ‘I’ve got a $1 million mortgage. I’m the man, give me the best rate.’ But that’s not necessarily the case,” he says.
In fact, those people are paying even higher rates than those from the banks because their loans have no government backing. If they can’t come up with the minimum downpayment of 20% required by law to borrow from a major bank, they must seek a loan in the subprime market.
Just as in Vancouver, Toronto buyers are now scrambling to come up with the 20% downpayment or $200,000 on a $1 million home, if they want to borrow from a major bank. And, just as happened on the West Coast, Toronto buyers are turning to sub-prime lenders to get them over the hump, facing interest rates of close to 13%.
Yana Papanyan, vice-president of credit and underwriting at First Swiss Mortgage Corp., which is a major player when it come to helping this subprime segment of the market, says in a typical situation, a client might buy a property worth $1 million but only have $100,000 downpayment. First Swiss Mortgage will provide the other $100,000 under a second mortgage starting at 12.99%.
“Clients have to top up to 20% to get a bank to approve. We are filling that gap between what the client has as a downpayment and what the bank will accept,” said Ms. Papanyan. “About 80% of [First Swiss’ mortgages] in Vancouver are high-priced properties.”
First Swiss is not regulated by the federal government; that interest rate is considered competitive based on risk factors including the fact it is a second mortgage behind the bank’s debt.
Why was $1 million chosen anyway?
One positive for these people is they do not end up paying mortgage default insurance, which can be as much as 3.15% of the value of a mortgage, based on current CMHC guidelines.
Benjamin Tal, deputy chief economist with CIBC, says rising prices and the $1 million government threshold is sending more consumers into the subprime market to borrow money. He estimates alternative lenders, who are major beneficiaries of that subprime market, now underwrite 2.2% of all mortgage loans, with the market having grown by 25% over the past year.
“When you say $1 million, people think ‘that’s extremely high expensive properties.’ They are not. This [restriction on loans for homes worth $1 million or more] is leading to less regulated entities entering the market,” said Mr. Tal, adding his data for Ontario shows that people are borrowing just to get the downpayment.
Mr. Tal also wonders whether Ottawa is going to have revisit the rules on whether it is willing to insure homes worth than $1 million.
“It’s a legitimate question. Why was $1 million chosen anyway?,” said Mr. Tal. “This is probably not consistent with the spirit of what they want to do, because the spirit of CMHC is to make housing affordable for young people.”