Buyers turn to renting, but low mortgage rates remain

Mortgage restrictions are turning first-time homebuyers into renters, and the increase in rental demand is resulting in higher costs, according to an article from Canadian Mortgage Trends.

Writing for the news source, Rob McLister cites a release from Urbanation, a real estate information firm focused on the Toronto condominium market, as proof of rising rents. Not only does the report from Urbanation show that rental activity is steadily growing, it shows that rents have increased by more than 10 percent over the last two years, adding an additional $170 per month or 23 cents per square foot on average.

"Demand for renting condos has heated up with less first-time buyers," said Shaun Hildebrand, senior vice president at Urbanation. "Rental transactions have exceeded resale volumes in the condo market since mid-2012, when the latest round of mortgage rule changes came into effect."

The number of units listed for rent on the multiple listing service system grew by 19 percent during the first quarter of 2013 on a year-over-year basis. Meanwhile, of the 4,859 units listed, 13 percent were rented out during the first quarter, compared to 2 percent that were resold.

The increasing value of rental properties is also causing investors to hold on to them for longer.

"Investors are increasingly choosing to hold their units rather than flip them for sale," Hildebrand said. "For the first time in a while, rents are rising faster than prices."

It doesn't take a degree in economics to understand what's happening. With mortgage restrictions discouraging first-timers from buying a home, they're turning to renting in droves. Higher demand equals higher prices, and the rules put in place by the Canadian government to cool the housing market are now resulting in higher rents.

Mortgage restrictions affect first-time buyers
The restrictions put in place during July 2012 regarding government-insured mortgages – which included reducing amortization periods and loan-to-value ratios – made it that much harder for borrowers without 20 percent equity to obtain financing. While this affected many borrowers, it was especially rough on first-time homebuyers. A report from the Bank of Canada, Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market, shows that 80 percent of first-time buyers require mortgage insurance, putting them at the mercy of whatever rules the Canadian government implements.

However, when it comes to affording homeownership, it seems that first-time buyers are ahead of the curve in at least one regard: mortgage rates.

Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, told the Toronto Star that 40 percent of mortgages from new buyers are obtained through mortgage brokers. This is a significantly larger number than the Canadian mortgage market as a whole, with nearly a quarter of Canadian mortgage being obtained through brokers.

So what does this have to do with mortgage rates? Well, studies show that mortgage brokers get better discounts on interest than other mortgage providers.

"Over the full sample the average impact of a mortgage broker is to reduce rates by 17.5 basis points," states another study from the Bank of Canada, Discounting in Mortgage Markets. "Brokers are a significant factor, therefore, in driving discounts."

It's also likely that first-time homebuyers turn to mortgage brokers for other reasons besides their ability to get low mortgage rates. Purchasing a home can be a complicated process, and the expertise brokers can offer is often just as valuable as their discounts. Having a professional around to help walk a buyer through the process can turn a frustrating experience into a smooth one.

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