Ottawa mortgage cooldown could spark market activity
The chief economist of the B.C. Real Estate Association has weighed in on a move to tighten mortgage rules. Brendon Ogmundson doubts whether the proposed increase of the minimum qualifying rate for uninsured mortgages will significantly cool down the redhot housing market.
Ogmundson also anticipates a further increase in market activity this spring as some buyers may try to beat the new rules that could come into effect on June 1, 2021.
“You might see a ramp-up of activity before that to get ahead of that change,” Ogmundson told the Straight in a phone interview.
The BCREA economist added that this could “actually increase demand throughout the spring and then slow in the summer”.
Last week, the federal banking regulator announced that it is tweaking mortgage rules. The Office of the Superintendent of Financial Institutions wants to increase the qualifying rate for uninsured mortgages amid concerns about an overheated housing market.
“The current Canadian housing market conditions have the potential to put lenders at increased financial risk,” the OSFI said in an April 8 media release.
The regulator explained that a higher qualifying rate “adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of change in circumstances”.
These include events like a “reduction of income or a rise in mortgage interest rates”.
The current qualifying rate is 4.79 percent, which is the five-year conventional mortgage rate by the Bank of Canada.
The OSFI is proposing a new qualifying rate for uninsured mortgages, which is the higher of either the mortgage contract rate plus two percent or 5.25 percent.
Uninsured mortgages are loans with down payments of 20 percent or more of a home’s purchase price.
The proposed change does not affect insured mortgages, where lenders have to qualify for the higher of either the Bank of Canada’s conventional five-year mortgage rate or the interest rate negotiated with the lender.
Insured mortgages are loans by borrowers who have a down payment of less than 20 percent of the home price.
In 2012, the OSFI introduced a guideline for mortgage underwriting known as B-20, and this has been amended over time.
BCREA’s Ogmundson is not enthused by the latest tweak. “The proposed change to the B-20 mortgage stress test, which would set a minimum qualifying rate of 5.25 per cent, is unlikely to have a significant impact as it only lowers a buyer’s purchasing power by about four percent compared to the existing qualifying rate of 4.79 percent.”
For comparison, Ogmundson noted that the “initial impact of the B-20 stress test in 2018…lowered purchasing power by more than 20 percent”.
It was in 2018 when the stress test that previously applied only to insured mortgages was extended to uninsured mortgages.
Ogmundson added that although the OSFI’s proposed measure is “not going to be as big” as what happened in 2018, it “certainly is a tightening”.
He noted that the current stress test is “already quite stringent”.
“I would assume that this will be followed by a similar policy for insured mortgages,” the economist speculated.
Tightening mortgage rules is an example of measures that dampen demand.
Overall, Ogmundson is not a big fan of demand-side measures, which he said produce only temporary relief. “I think we already have done about a dozen demandside interventions in the past 10 years.”
What Ogmundson wants to see are policies on the supply side. “I think we need to send a signal to market that we’re going to be supplying markets with enough units that we’re not going to see price accelerations,” he said.
Ogmundson also noted that one reason the market gets “some speculation” is that “investors are smart”. “They look at places that have a lot of demographic demand and not very much supply and not enough future supply.”
Ogmundson said that a healthy housing market is one where prices grow with inflation, or a little bit more.
“We won’t get there if we don’t have listings,” the economist said.