“Fitch believes that the new measures may temper the housing market, especially in cities that are significantly overvalued,” Fitch said in a report, released Wednesday. “According to a Fitch study published earlier this year, home prices across Canada are estimated to be about 25% above their sustainable value with major regional variations.”
Fitch is supportive of the income tax rule change, which targets foreign owners of real estate.
Under those guidelines, foreign owners are no longer able to take advantage of capitals gains tax exemptions.
“The income tax rule change in particular should reduce housing demand from foreigners. In Vancouver, this will reinforce the effects of the 15% tax on foreign home purchases put in place by the British Columbia government in August,” Fitch said. “Data from the Real Estate Board of Greater Vancouver indicate that average sale prices of detached houses have already dropped by roughly 16%, led by higher priced properties.”
The agency also argued the new guidelines for insured mortgage portfolios could impact non-insured underwriting.
“While insured mortgage loans are prohibited from securing this subsector of the covered bond market, changes to insured mortgage loan underwriting requirements could influence non-insured mortgage loan underwriting requirements. Any tightening of non-insured mortgage loan underwriting requirements would further help to cool the housing market and also help to address the concern of heightened borrower leverage.
The new rules will cool the markets in Toronto and Vancouver and improve credit quality, according to the agency.