Mortgage process tightening.
Interest rates have been low for years now. I can never remember a time when they’ve been so low. The trouble is that some people cannot remember when they were high either.
I recall working in construction as a scaffolding sub-contractor on a large housing development in the UK during the late eighties when the site agent came out from his office, called in all the trades and told us that the site was being mothballed. My company and others had over two years of work still to go. The reason for the shutdown? Interest rates had been raised to 17 per cent effectively killing the housing market stone dead. We had to lay off 90 per cent of our work force just to survive. I recall that mortgage rates peaked at 18.5 per cent. How many people could take that kind of hike now?
Central banks and organizations are worried about low rates. Low rates mean low returns for lenders, which may mean that lenders take more risk for better returns. Taking risks with other people’s money. Look where that got us in the crash. Have the boys in the city learned over much? I’m leaning towards the no side.
There is an overwhelming desire to raise rates to what might be regarded as normal. The trouble is that desire and economic conditions for it to happen, I think, differ widely. That being said, rates have crept up a tad even if it’s only at a quarter of a per cent at a time. I still think that a motive behind that may be to give central bankers wriggle room to drop rates if and when the brown stuff hits the fan again. But I’m just a cynic. Nonetheless, I don’t think anyone has figured out how to resolve the conundrum of getting out of years of quantitative easing (QE). To us lesser mortals that’s printing money but QE sounds better.
Anyway, background and digressing over. Canada’s banking regulator the Office of the Superintendent of Financial Institutions (OSFI) has revealed new regulations for the mortgage industry. This rule train has been on the tracks for a while in draft form but will come into force on January 1, 2018.
In essence, uninsured borrowers, buyers that can put down a 20 per cent or greater deposit, will have to undergo a stress test too. The stress test being could the buyer afford the payments on rates at the five-year posted average rate or two per cent higher than the rate currently paid, whichever is higher. Lenders will have to more vigilant about loan-to-value ratios too.
This move could mean that buyers with an income of $100,000 per annum that could currently qualify for a property in the region of $725,000 will be constrained to around the $570,000 bracket, which could cool overheated markets in some places. Greater and lower incomes brackets will obviously be affected too.
Some pundits have expressed concern that such a move could cool already chilly housing markets in some places. I think it could too. Provincially regulated lenders do not fall under the auspices of OSFI so it wouldn’t be a surprise to see a market shift towards credit unions.
Another thing that sticks out for me is that by cooling the housing market in this way valuations may be lower thus tipping some loans out of acceptable loan-to-value ratios. The whole thing becoming a self-fulfilling prophesy if you will. Home owners could see their equities shrink or even disappear. Change for the good therefore, could unintentionally, become change for the bad. Maybe a stress test on the effects of changing regulations is in order?