New guidelines hit move-up buyers
Banking regulator’s revised rules include new financial stress tests
Expanded stress testing of mortgages will have “a significant dampening effect” on the housing market and could hit move-up homebuyers hardest, says Doug Porter, BMO financial group chief economist.
The latest lending restrictions announced by the Office of the Superintendent of Financial Institutions (OSFI) on Tuesday, could also slow interest-rate increases next year if the Bank of Canada pauses to assess the impact of the new borrowing rules, he said.
Under the new rules, even homebuyers who don’t require mortgage insurance because they have a 20 per cent down payment, will have to prove they can meet their commitment if interest rates rise above the five-year benchmark rate published by the Bank of Canada or 2 per cent higher than their contracted mortgage rate, whichever is higher.
“This is potentially more wide-ranging and it will dampen the housing market in 2018, probably more significantly than we saw (with) the earlier federal measures,” Porter said.
The guidelines, similar to OSFI’s draft release in July, take effect Jan. 1.
A survey by industry group Mortgage Professionals Canada showed the requirement would disqualify about one in five potential home buyers.
Move-up buyers could be disproportionately affected because they would be most likely to have home equity and qualify for an uninsured mortgage, Porter said. He noted that many first-time home buyers in Toronto and Vancouver found ways — whether through gifts from their parents or other sources — to qualify for uninsured loans when last year’s stress test was introduced for insured mortgage applicants.
Porter estimated those restrictions took 5 to 10 per cent buying power out of the housing market. He expects the latest change will have a similar impact.
In a wide-ranging economic speech to the Building and Land Development Association (BILD) earlier Tuesday, Porter said he didn’t expect the central bank to raise rates again this year.
The new OSFI guidelines, he said later, are “another reason to believe the bank will hold off on rate hikes this year. Between the uncertainty around NAFTA and between these measures, I think the bank will take a bit of a pause at this point.”
Although the Canadian economy is expected to slow next year, the underlying factors for the housing market remain strong.
“We have strong population growth, we still have relatively low interest and job growth has been robust. Consumers are confident, so it’s not as if this will drive the market down abruptly, but it will have a significant dampening impact,” Porter said. Uninsured mortgages account for 46 per cent of the country’s total $1.5 trillion mortgage credit outstanding, according to Bank of Canada data. That’s up from 45 per cent a year earlier.
OSFI has been tightening underwriting standards for home loans in the past five years as federal and provincial governments have also introduced market-cooling measures in Vancouver and Toronto.
“Our mandate is focused on the safety and soundness of the federally regulated financial institutions,” said Superintendent Jeremy Rudin, who added that he might revisit the stress testing as market conditions changed.
Royal LePage CEO Phil Soper agreed that move-up buyers “will be primary victim of these new regulations.” In the Toronto region, he said, the 905-area communities will feel the biggest impact.
“The 416 has shaken off the spring-triggered market correction and is moving along quite nicely. But the 905, which relative to the underlying value of the land, overshot more than the core did in the 2015 to early 2017 market expansion — it’s still in tenuous recovery mode,” Soper said.
Because the new lending rules will likely mean buyers can afford less house, they could find themselves unable to afford the next rung on the property ladder. Then it becomes a question of whether they want to move at all, he said.
Soper said that federal and provincial regulators need time to assess how the combined changes to mortgage rules in the last year “impact the delicate ecosystem that is Canadian housing.”
The chief economist of the Canadian Real Estate Association, Gregory Klump, said he fears the impact of further cooling measures could negatively impact other housing markets.
“It also jeopardizes Canadian economic growth, which is already showing signs of fading,” he said in an Oct. 13 statement.
Toronto area home prices have slowed considerably since the market peaked in April with a 33 per cent year-over-year increase. In September, the Toronto Real Estate Board was reporting only a 2.6 per cent monthly year-over-year rise.
The Ontario Real Estate Association (OREA) issued a statement calling the OSFI changes “overkill” that “will hurt middle class families and punish careful savers most.”
“It’s time for governments to hit the brakes on more demand-side policy interventions and take a wait-and-see approach,” OREA said.