Mortgage demand being ‘pulled forward’
For Canada’s big banks, a housing hangover may loom in 2018
Canada’s biggest banks may have to shake off a housing-related hangover in the New Year, as new guidelines for uninsured mortgages have homebuyers rushing to borrow now and lenders bracing for weaker loan growth later.
National Bank Financial analyst Gabriel Dechaine said in a report last week that monthly balance sheet data that had been filed with the Office of the Superintendent of Financial Institutions, the federal regulator of the banking system, shows that “mortgage demand is being ‘pulled forward’ ” by the new lending guidelines, which take effect Jan. 1.
“Moreover the trend could continue in early 2018, as bank customers ‘buy time’ by obtaining mortgage pre-approval, which could allow them to purchase a home under older underwriting guidelines for an extended period (i.e. up to 120 days),” Dechaine wrote. “While these borrowing strategies could lead to surprisingly high mortgage volume growth into the New Year, we believe evidence thereof could amplify concerns of a mortgage (and broader housing sector) activity drop-off in the balance of the year.”
The new B-20 guidelines, as they are called, require a stricter “stress test” for uninsured mortgages, which are typically loans made to a homebuyer who makes a down payment of 20-per-cent or more. The new minimum qualifying rate for an uninsured mortgage will be either the Bank of Canada’s five-year rate or the lender’s rate plus 200 basis points, whichever is greater.
Management at the big banks said during their most recent earnings season that the new guidelines will weigh on their mortgage numbers, as the guidelines apply to all federally regulated financial institutions. The “Big Six” — BMO, CIBC, National, RBC, Scotiabank and TD — are calling for a five per cent to 12 per cent slowdown in mortgage originations next year because of the new B-20 rules.
Alex Ciappara, director of credit markets and economics policy for the Canadian Bankers Association, said the dip would likely slow mortgage growth from the five per cent to six per cent range seen this year to four per cent to five per cent in 2018.
Ciappara also said the decline in volume could be offset by higher interest rates, but that the banks would also benefit from stronger credit books.
“It may hurt a bit ...but I think the large banks will be able to adjust,” he said.
However, any pullback would disrupt what has been a steady stream of record profits and stock gains for the banks. The S&P/TSX Composite Index for the banking group is up more than 10 per cent for the year, compared to about 5.7 per cent for the broader S&P/ TSX.
Dechaine said that October data from the banks backed up the trend that demand for uninsured mortgages was being pulled forward ahead of the Jan. 1 deadline for the B-20 rules, such as 18 per cent year-over-year growth in the loans, which marked a fiveyear high point. Similar points were made during the banks’ latest earnings season.
“They indicated that they saw, some of them, demand for mortgages get pulled forward because of that timeline,” said Ciappara.
But given the banking sector’s currently high price-to-earnings multiple, the potential for softer real estate prices, and uncertainty around NAFTA negotiations, “we believe that bank stocks could be headed for a near-term pause,” Dechaine added.
Bank of Canada Governor Stephen Poloz addressed the new guidelines in a Dec. 14 speech titled Three Things Keeping Me Awake at Night, one of which was high house prices and household debt. Poloz said BoC staff looked at mortgage data from federally regulated lenders and found that about 10 per cent of low-ratio mortgages, or around 36,000 loans worth about $15 billion, would not have qualified last year if the new B-20 stress test were in place.
“The most likely response is for people to look for a less-expensive house with a smaller mortgage so they qualify under the new rules,” Poloz said. “Others might try to boost their down payment, or delay the purchase until they can do so.”
“But people might also look for a lender that is not bound by these new mortgage rules so they can avoid facing the stress test,” Poloz added. gzochodne@postmedia.com Twitter: @geoffzochodne