Will Trudeau’s Proposed Mortgage Change Cool This Housing Market?

The tightening of qualification rules and increase in the benchmark rate by June 2021 could cool down Canada’s housing market. For income investors, the RioCan stock is recovering from the COVID shock.

| More on:
Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Housing prices in Canada have surged over the past year, notwithstanding the COVID-19 outbreak. The historically low-interest rates and desire for larger spaces in the suburbs have induced a buying frenzy. Now, the developing bubble could burst anytime soon.

Recent data shows that the value of the residential real estate has risen by 17% in the last 12 months. The percentage increase is crazy, and the growth’s pace is too fast. Notably, the bidding wars are not only in the big cities like Montreal, Toronto, and Vancouver.

According to the Canadian Real Estate Association (CREA), the price gains in 12 major markets (about 25% of the total) are 30% or more. Given the scenario, should the administration of Prime Minister Justin Trudeau take bolder steps to calm the hot housing market in 2021?

Tighter qualification rules

The Bank of Canada is likely to maintain low interest rates a while longer. Some industry watchers wonder whether the Trudeau government has options to tackle the red-hot housing market. However, Jeremy Rubin, head of the Office of Superintendent of Financial Institutions (OSFI), has changes in mind to rein in the housing boom.

Canada’s banking regulator intends to tighten qualification rules for uninsured mortgages. He fears low-interest rates will put new home buyers deep into debt. Rubin said, “Sound residential mortgage underwriting is always important for the safety and stability of financial institutions.”

Proposed changes

OFSI proposes a new benchmark to determine the minimum qualifying rate for uninsured borrowers. A fixed-rate of 5.25% rate will replace the current 4.79%, the advertised rates of banks. The new measures shall take effect on June 1, 2021.

Stephen Brown, a senior Canada economist at Capital Economics, believes a higher benchmark rate will reduce the recent momentum in the prices for single-family homes. Finance Minister Chrystia Freeland said they would continue to monitor housing market conditions. Also, the Finance Department will closely examine the results of OSFI’s consultations.

Recovering top REIT

Canada’s housing market is resilient as ever, but people looking to buy real estate investment properties should beware. Some industry experts say the boom is inexplicable. Due to speculations, the real estate prices could be overvalued. Prices could fall significantly if the bubble bursts.

For now, real estate investment trusts (REITs) appear to be safer alternatives. The cash outlay is lower, and you earn rental-like income from dividends. RioCan (TSX:REI.UN), one of the prominent landlords in Canada, had a horrendous 2020.

While it posted a net income of $65.6 million in Q4, the net loss for the year was $64.8 million. In case of unresolved tenant defaults, RioCan can offset rents via the approximately $28.6 million it holds as security deposits. Some tenants also issued letters of credit worth around $4.6 million.

However, the shares of this $6.43 billion REIT have gained 22.52% thus far in 2021. If you were to invest today, the share price is $20.25, while the dividend yield is still decent at 4.78%. A $50,000 investment will produce $2,390 in passive income.

Lenders’ protection

The OSFI will gather feedback until May 7 and reveal the final changes by May 24, 2021. Rudin said they want to make sure lenders have protection when mortgages obtained today renew in three, four, or five years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

energy oil gas
Dividend Stocks

2 High-Yield Energy Stocks to Buy as Recession Approaches

Energy stocks such as TC Energy and Canadian Natural Resources allow investors to generate income even in recessionary times.

Read more »

green power renewable energy
Dividend Stocks

3 Top Dividend Stocks to Drive Your Passive Income

These three high-yielding, safe dividend stocks could boost your passive income.

Read more »

protect, safe, trust
Dividend Stocks

TFSA Wealth: How to Earn $363 in Monthly Passive Income for Life

Canadian investors can harness the power of the TFSA to generate steady tax-free passive income for decades.

Read more »

Canadian Dollars
Dividend Stocks

TFSA Millionaire: How to Turn $40,000 Into $1.2 Million for Retirement

Here's how TFSA investors are using the power of compounding to buy top Canadian dividend stocks to build retirement wealth.

Read more »

edit Balloon shaped as a heart
Dividend Stocks

My 3 Favourite TSX Stocks Right Now

These three TSX stocks are my favourite performers. All have strong dividends, future growth, and historic performance behind them.

Read more »

Dividend Stocks

Passive Income Generator: 1 Dividend Stock Yielding 6.16%

A high-yield energy stock that pays monthly dividends is a reliable passive income generator for investors.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

3 Cheap Canadian Dividend Stocks to Buy Now for Passive Income

Investors seeking quality passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Oversold TSX Dividend Stocks to Buy for Passive Income

While these high-quality dividend stocks are oversold, they are some of the best stocks to buy for passive-income seekers.

Read more »